Here at StreetAuthority, we love companies that have a wide
moat around their operations and possess powerful long-term
Investing in these companies is often quite simple. You
buyshares -- andput them on the shelf.Year after year, they
appreciate in value. Over the course of many decades, they
deliver substantialinvestment returns. Wecall these
Yet the ride isn't always quite so smooth for some "Forever
Stocks." Even companies like
hit a rough patch, temporarily falling deeply out of favor with
investors. And when that happens, savvy investors know to pounce,
buying shares at marked-down prices.
Such an opportunity exists now with a company headquartered
5,000 miles south of the New YorkStock Exchange.
CPFL Energia (
is a very good company having a very bad year. Shares are far
from their recent highs, though as the dust settles, look for
this stock to rotate back into favor.
Brazil's largest electric utility, CFPL was forced by the
Brazilian government to roll back its rates in 2012 in an effort
to lower consumer prices. Investors were none too pleased, as it
became immediately apparent that the company'sdividend couldn't
be sustained: A $1.37 a share payout in 2011 had shrunk to $1 in
2012. This year, the dividendwill likely be 80 to 90 cents a
share. Yet that should mark a bottom, and in coming years,
powerful demographic trends should help CFPL to again become a
robust dividend grower.
Power To The People
Although the Brazilianeconomy is undergoing growing pains as it
transitions from an emerging economy into a developed economy,
the long-term trend of an expanding middle class implies an
ongoing need: more power to run refrigerators, air conditioners,
washing machines, TV sets and other appliances bought by folks
who only recently developed the spending power to buy such
And CFPL has been at the forefront of that trend. The
utility'ssales base has grown from $3 billion in 2004 more than
$6.5 billion today. More importantly, the demographic trend is
far from played out.
Just as we saw here in the U.S. in the 1950s, a rising middle
class creates a newwave of spending on goods and services that
generates a further employment expansion. We saw that in Japan in
the 1960s and '70s and in South Korea in the '80s and '90s -- and
we're now only part of that way through that process in Brazil.
Though the Brazilian economy is currently the seventh-largest in
the world, it is likely to crack the top five by 2030.
By CFPL's own estimates, Brazil's power needs will grow at
least 5% annually through 2019. That may not seem like much, but
it's a 40% increase from 2012 levels. (To put that in context,
total electric power demand in the U.S. has risen less than 10%
over the past decade.) The Brazilian government agrees, and its
Ministry of Mines recently approved a 10-year power generation
expansion plan that will deliver an additional 167 gigawatts to
the Brazilian grid.
Unlike U.S.-based "Forever Stocks," an investment in CFPL has an
added wrinkle. Investors are exposed to currency movements, which
can impinge or magnify stock pricegains . Lately, it's been an
Since the summer of 2011, the Brazilian real has lost more
than 30% of its value against the U.S. dollar, which has had a
direct negative impact on Brazilian share prices as they are
converted back into dollars. This currency could fall further in
the nearterm , but long-term trade flows suggest it is already
becoming quiteundervalued , and the stage is set for an eventual
rebound in the real. That would provide a tailwind to CFPL's
shares (and its dividend) as well.
Risks to Consider:
The majority of Brazil's electricity is derived from
hydroelectric power, and a drought in the country would put a
severe strain on the nation's utilities.
Action to Take -->
CFPL Energia reports second-quarter results Aug. 8. At that
point, management is likely to focus on the state of the current
dividend as well as potential future growth for the payout.
Though this stock has fallen by more than a third over the past
18 months, its currentdividend yield , in the 5% range, along
with dynamic growth prospects, should help this stock to move
back into favor in thequarters ahead.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.