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It’s World Cup fever with United States playing Germany today and Brazil grabbing the headlines as the current center of the soccer universe (sorry, we still call it soccer here at Wyatt HQ in Vermont).
While you might be able to make some money selling patriotic trinkets outside Rio, there’s an easier – and more lucrative — way to make money in Brazil. I’m not talking about investing in Nike, either. A number of companies will benefit from the long-term growth of Brazil’s rising middle class.
About half of Brazil’s population is now considered middle class. Only about 29% were considered upper middle-class and upper class in 2010. That number is expected to hit 37% by 2020. These more affluent consumers will be spending and borrowing more.
Ultimately, the growing middle class in the country should drive demand for wireless products, banking products and infrastructure buildup. Given that the country is still an emerging economy, it would be prudent to focus on Brazilian stocks that offer some downside protection via dividends. Here are the top three dividend stocks in Brazil:
Brazilian Stock #1: Vale SA (NYSE: VALE)
Vale is one of the leading raw material companies, selling iron ore, coal and various metals. It’s one of the largest iron ore producers in the world, and, given Vale’s global presence, it’s also a play on global growth, including the rising demand from China.
However, Brazil has made a commitment to build up its own infrastructure, including public transit, which should be a positive for Vale. Vale pays a 6% dividend yield and trades at a P/E ratio of 6.9 based on next year’s earnings estimates. Just over 10% of its market cap is covered by cash.
About 70% of its revenues are generated via iron ore production. Another 15% comes from kaolin, potash, copper and gold. Vale is Brazil’s only producer of potash and it’s the world’s third-largest producer of kaolin. Compared to the world’s other major iron ore producers, Vale is the cheapest stock. Vale trades at 1.5 times book value, while the likes of BHP Billiton and Rio Tinto trade at 2.6 times and 1.9 times, respectively.
Brazilian Stock #2: Telefonica Brasil SA (NYSE:VIV)
This telecom company provides fixed-line and wireless services to residential and commercial customers in Brazil. After acquiring Vivo, Telefonica Brasil is now the largest telecom operator in Brazil in terms of revenues. Its nationwide wireless market share is close to 30%.
Telefonica Brasil offers a 4.3% dividend yield. It also has a fairly strong balance sheet, with a debt-to-equity ratio of only 15% and 9.5% of its market cap covered by cash on the balance sheet.
About two-thirds of its business is generated via mobile wireless, as opposed to fixed-line. Its Vivo subsidiary is a provider of wireless telecommunications services in all Brazilian states. The next major growth opportunity is in the 4G market, which is gaining traction in Brazil, and Telefonica Brasil is focused on building out its 4G network. Brazil’s growing middle class should be a big positive for Telefonica Brasil, as demand for wireless services will continue to rise.
Brazilian Stock #3: Banco Bradesco SA (NYSE:BBD)
Banco Bradesco is one of Brazil’s top banking institutions. Its dividend yield is right at 2.9%. Banco Bradesco trades as one of the cheapest major banks in Brazil. It trades at just under two times book value. Its top competitor, Itau Unibanco, trades at 2.2 times book value.
Banco Bradesco has underperformed its major peers over the last year in terms of stock price, but 2014 is shaping up to be a solid year for the bank. The company’s EPS is expected to grow by 18% this year and 23% next year. Meanwhile, its return on equity is an impressive 20%.
The access to, and usage of, financial services in Brazil remains low compared to developed countries. The market appears to be relatively underpenetrated. The rising demand for infrastructure buildout should also lead to loan portfolio growth for Banco Bradesco.
International stocks remain a great source for superior dividends. The three Brazilian stocks above all have impressive exposure to one of the fastest-growing countries in the world.
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