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Brazil, despite its somewhat sluggish economy, has been a big winner in the stock market.
The iShares MSCI Brazil Index is up nearly 29% over the last six month. Meanwhile, the S&P 500 is up just 11%.
Helping drive the emerging market’s outperformance has been the prospect that there might soon be a new President leading Latin America’s largest country.
Hopefully a President that’s more business-friendly.
Under the current President, Dilma Rousseff, Brazil’s economy has slipped into a state of stagflation. The plateauing of employment rates and rising wages is also working against incumbent President Rousseff.
Brazil still has plenty of growth left and could see impressive growth in its middle class over the coming years. Over 7 million of its people are still living off around a dollar a day.
Even if Rousseff is re-elected, she won’t have to worry about another election until 2017.
Thus, regardless of how the elections play out in October, the government should be more accommodative to its largest businesses in the near-term.
Here are the top 3 dividends in this emerging market:
Emerging Market Dividend No. 1: Petroleo Brasileiro Petrobras SA (NYSE: PBR)
Petrobras offers a 4.35% dividend yield, but its recent dividend history is spotty. The real reason to invest in this state-owned oil and gas company is the company’s vast resources and production potential.
Petrobras has a commitment to reward shareholders proportionally with its profit. More profits means a potential return to the days of $1 a share dividends we saw back in 2012 and 2011.
Petrobras is the largest publicly-traded Latin American oil company. It’s also one of the few ways to invest in the Latin American oil industry. It produces and refines nearly all of Brazil’s oil and is considered a “quasi-monopoly.”
It trades at a P/E (price-to-earnings) ratio of just 7.5 based on next year’s earnings estimates. Along with Wall Street’s earnings growth expectations, Petrobras is a very enticing growth at a reason price opportunity, trading at a P/E to growth (PEG) ratio of just 0.7.
Petrobras has been an under-performer over the last year or so, because the government forces it to sell gas to consumers at a loss. The idea is that this helps control inflation.
If the Brazilian government allows Petrobras to increase fuel prices, which could happen after the Presidential election, this will be a big positive for the oil giant.
Emerging Market Dividend No. 2: Vale SA (NYSE: VALE)
Vale offers a 5.3% dividend yield and is one of the top producers of iron ore in the world. The majority of its production facilities are in Brazil, which is also a top end market for the company.
Vale should be a big benefactor of a rebounding global economy. Another one of its biggest end markets is China, which recently posted manufacturing PMI (Purchasing Manager’s Index) that hit an eighteen month high. Suggesting that the country is seeing positive growth in infrastructure spending.
When you stack Vale up against the other global mining companies, BHP Billiton and Rio Tinto, Vale offers the highest dividend yield and trades the cheapest from a valuation perspective. Vale’s P/E ratio (based on next year’s earnings estimates) is a mere 8.3, while BHP trades at 12.7 and Rio Tinto at 10.5.
One of Vale’s biggest focuses is on lowering costs. It’s done a great job so far. Its operating margin is above both BHP and Rio Tinto and is now well above 30%. Compared to an operating margin of just around 20% in early 2013.
Michael Novogratz, Director of Fortress Investment Group, said at the Delivering Alpha conference that “Petrobras and Vale could move straight up if Dilma [Rousseff] loses the election.”
Emerging Market Dividend No. 3: Telefonica Brasil SA (NYSE: VIV)
For true dividend seekers, Telefonica is where it’s at in Brazil. It offers the highest dividend yield of the three, coming in at 7.5%. Not only is this one of the highest dividend yields among major global telecoms, but its P/E ratio of 12.6 (based on next year’s earnings estimates) puts the company as one of the cheapest to own.
This telecom offers fixed line services in Sao Paulo and mobile services across Brazil. The telecom business is fairly straightforward, and Telefonica should benefit from a strong economy. Higher employment means more money for individuals and businesses to spend on telecom and pay-TV services.
While turning to emerging markets for income isn’t ideal for every investor, Brazil appears to offer a very compelling risk/reward tradeoff. The yields are well above what you’ll find in developed markets and the upcoming election could be a game changer for its largest companies.
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