Bloomberg News

Top Emerging-Market Dividends Hurt by Rousseff: Corporate Brazil

November 28, 2012

Top Emerging-Market Dividends Hurt by Rousseff

Shares of power companies plummeted after the government ordered a cut in electricity rates for utilities applying for license renewals. Photographer: Dado Galdieri/Bloomberg

President Dilma Rousseff’s plan to reduce electricity and phone service costs is fueling speculation that Brazilian utilities will cut dividends as projected yields are the highest in emerging markets.

Centrais Eletricas Brasileiras SA (ELET6), the state-run power company known as Eletrobras, is forecast to pay a dividend of 1.2 reais per share in 2013, equal to 14.3 percent of the current share price, data compiled by Bloomberg show. That’s the highest projected yield among the 818 members of the MSCI Emerging Markets Index after phone carrier Oi SA (OIBR4)’s 14.6 percent.

While power and phone companies haven’t changed dividend policies to reflect revenue they’ll lose from regulation changes and increased competition, investors have already driven down stock prices as much as 61 percent, distorting dividend yield projections, said Marcio Cardoso, a partner at Sao Paulo-based brokerage Titulo Corretora de Valores.

“All these forecasts about Eletrobras’ dividends are just unreal, because it is impossible to know how much the utility’s profit will be after the changes in rules about power rates,” said Marcel Kussaba, the head of equity research at Quantitas Asset Management, which oversees 12 billion reais ($5.7 billion), in a phone interview from Porto Alegre, Brazil.

Shares of power companies plummeted after the government ordered a cut in electricity rates for utilities applying for license renewals. Phone companies Oi and Telefonica Brasil SA sank after Brazil’s regulator Anatel acted to increase competition and improve mobile-phone service.

Utility Valuations

Three Brazilian utilities are among the four companies forecast to post the highest dividend yields for members of the MSCI Emerging Markets index, with AES Tiete SA (GETI3) projected to post 12.6 percent, according to data compiled by Bloomberg. Those figures compare with an estimate of 12.7 percent for Budapest- based Magyar Telekom Telecommunications Plc.

Eletrobras has fallen 55 percent since Rousseff unveiled her plan to reduce energy rates on Sept. 11, part of a 19 percent slide in the MSCI Brazil (MXBR)/Utilities index, the biggest slump among 10 industry groups. The stock is down 69 percent this year, the most on the benchmark Bovespa index, which slipped 0.4 percent.

Eletrobras is expected to cut its dividend per share by 13 percent from last year, according to the average estimate of six analysts surveyed by Bloomberg. Its preferred shares trade at 5.8 times its estimated 2013 earnings, compared with the average ratio of 10.4 among 68 members of the Bovespa (IBOV) index.

“Given the uncertainties that persist, we’re not willing to add to our holdings even at current levels,” Will Landers, who manages about $6 billion in Latin American equities at New York-based BlackRock Inc., said in a written response to questions, referring to Brazilian power utilities.

Mobile-Phone Fees

Rio de Janeiro-based Oi, whose shares have tumbled 26 percent this year, is forecast to reduce per-share dividends by 36 percent to 1.2 real in 2013. The company’s preferred stock trades at 18.7 times its estimated earnings.

In an attempt to boost competition, the telecommunications regulator on Nov. 1 approved rules for mobile-phone fees that will help smaller carriers and reduce the per-minute charges that companies pay each other for calls between their networks. The measure followed a temporary ban on new subscriptions by carriers including Oi and Tim Participacoes SA in some states because of network failures.

Oi’s press office declined to comment on its dividend payout plans. Eletrobras didn’t respond to phone calls and e- mails seeking comment. A representative for AES Tiete wasn’t available yesterday.

Compensation Rules

Power utilities may offset the impact the government’s measures will have on earnings by not seeking renewals for some licenses, said Marc Sauerman, who helps oversee 650 million reais at Curitiba, Brazil-based J Malucelli Investimentos.

“That would help to shield profitability from the government’s interference,” Sauerman said.

Brazil may also raise the amount of compensation offered to electricity companies that accept lower rates, according to a government official who asked not to be identified because the information isn’t public. Given that shares have plunged since Rousseff’s plan was unveiled, there may be a positive reaction if companies manage to get more compensation from the government, Sauerman said.

For the new rules to be enforced, Rousseff’s decree must be approved by Brazil’s Congress, which can also propose changes to the plan designed by the government. Since Congress can still change the proposal, it’s difficult to forecast accurately what will happen with electric utilities, said Otavio Vieira, who helps manage 270 million reais as a partner at hedge fund Fides Asset Management.

“It’s hard to see these stocks as a buy opportunity now, even with ratios that at a glance may look appealing, because we don’t even know what exactly the new rules are going to be,” Vieira said by phone from Rio de Janeiro.

To contact the reporters on this story: Ney Hayashi in Sao at ncruz4@bloomberg.net; Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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