AES Tiete: High Dividend Paying Brazilian Small Cap

| About: AES Tiete (AESYY)

AES Tiete (AESYY.PK) is a Brazil-based company active in the energy sector. It is controlled by Brasiliana Energia SA and is involved in production and commercialization of electric energy, mainly in the state of Sao Paulo, where it is based. AES Tiete owns 17 hydroelectric plants in Brazil, producing an accumulative 2,657 MW. It is Brazil’s second largest private power producer, representing 2.4% of total installed capacity.

The company recently announced Q2 2011 earnings of $150 million and reiterated its hope for getting the required environmental license to move forward with construction on a 550 MW natural-gas powered plant before the end of the year.

The company has been steadily climbing all year and the most recent pullback represents a great buying opportunity, especially for a stable utility company in an economy (and a city) with excellent growth fundamentals for the next 20 years AND with a quarterly dividend yield over 10%.

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This stock trades on the pink sheets but that’s actually common among smaller foreign companies (it has a market cap of about $2.7 billion ) for which the burden of registering with the SEC to get a big board listing is too expensive. In fact, lately many large companies have actually been de-listing to save costs.

As we’re fond of reiterating, the most important fact in considering a dividend paying stock (especially a foreign one) is the sustainability and potential growth of the dividend. Utilities have long been a staple holding among dividend investors for the stability of dividend payments.

This company is no different except that the growth of the Brazilian economy offers a unique upside opportunity that’s distinctly lacking from its US counterparts. Since 2006, the company has consistently yielded above 9%. It’s dividend has grown from $0.01 in May 2001 to $0.3064 this October.

Now looking at the 10-K form of the company, the first conclusion drawn is that the company revenues have been stable over the past year, both gross and net. Similarly, operating expenses also saw no major change and hence, the profits rose by only 6%. Net profit margin of the company stands at 39.2% which is excellent.

A rise was seen in company’s net debt over the past year. However, it can be explained by its future plans for expansion and modernizing older plants (again, good for dividend growth over time).

The balance sheet for AES Tiete is on the safer side on the whole. A current ratio of 2.30% and a quick ratio of 1.6% are both above the industry averages. The total debt to equity ratio of 43.70% falls below the industry average. Similarly, a return on capital of 21.73% and return on assets of 29.08% are remarkable and are among some of the best in the industry. This all speaks to a company that’s very prudently used its resources to grow shareholder value.

The company’s credit rating at Moody’s is Aa1 and at Fitch is AA-. This implies that the company’s debt securities are high grade, a mark of good financial health in general.

Environment has always been close to the company’s core values, and thus, large investments have been made in environmental projects. This has helped the company to project its positive image among the people and has earned accolades for this effort too.

AES Tiete has a 30-year concession (till 2029) and all its assured energy is contracted through a bilateral contract of purchase and sale of electricity with AES Eletropaulo, valid until 2015.

As we mentioned earlier, the big upside here is the Brazilian economy. Brazil’s economy is growing at a rapid clip (one reason its central bank recently raised rates) and fosters a business-friendly economy (virtually no threat of nationalization, unlike in Venezuela). Furthermore, given the growth fundamentals of the economy, we feel safe predicting that the demand for electricity will witness a sharp rise in coming days and AES Tiete faces no risk of going out of business.

One big reason that we’ve been huge fans of international dividend paying stocks is the embedded currency appreciation. US shareholders are earning 9-10% in dividends in Brazilian Reals that are ultimately converted to dollars. As long as the fundamentals for its currency remain strong, this dividend payer will be insulated from the secular erosion of the US dollar.

The conclusion is quite a simple one for investing in AES Tiete’s stocks. It’s a secure company with consistent historical trends, offering an extremely attractive yield with virtually guaranteed upside.

Disclosure: I am long OTCPK:AESYY.