My investing philosophy is pretty simple: I take a look at the macro view to determine what sectors, countries or themes I want exposure to, and then do a fundamental analysis to determine the best individual stocks in that theme. I value cash-rich companies with strong earnings growth that support a healthy and growing dividend yield.
I believe emerging markets are going to need to spend a lot of cash improving their infrastructure this next decade, and that this will be a very profitable theme for investors. I am certainly not the only investor to reach this conclusion, as emerging market infrastructure ETFs have been popping up lately (see PXR).
If you have a similar investment philosophy, I hope you enjoy my list of the best individual dividend stocks that play the emerging market infrastructure theme, and use it as a starting point for your own due diligence.
Empresa Nacional de Electricidad de Chile S.A. (EOC)
Empresa Nacional de Electricidad de Chile S.A. is an electrical utility company operating in South America. While there are many emerging market utility plays, I believe EOC stands out for a couple of reasons. First, it is a highly diversified play with coal, gas, oil and hydroelectric generation spread over 46 different plants operating in five different countries.
Second, among the major emerging market utilities, EOC is the most involved in developing new power infrastructure assets and has the most exposure to the less developed Latin American countries, like Chile and Columbia. Not only is EOC the most pure play on growing emerging market infrastructure, but its 5-year dividend growth rate has crushed the dividend growth of competitors CPFL Energia (CPL) and CEMIG (CIG).
EOC Key Metrics | |
Dividend Yield | 5.6% |
1-year Dividend Growth Rate | 51% |
5-year Dividend Growth Rate | 37.5% |
Dividend Payout Ratio | 36% |
Return on Equity | 20% |
5-year Total Return | 10.6% |
Analyst Recommendation | BUY |
Companhia de Saneamento Basico do Estado de Sao Paulo (SBS)
Many investors feel that water infrastructure is going to be a major theme in a resource-restrained world, so we can double down with water and emerging market infrastructure play SABESP. It provides water and sewer services in Brazil and has a monopoly position in the city of Sao Paulo. The company has performed in line with the broader Brazilian market until the recent downturn, when it’s low-risk model and steady profits have supported the share price.
While SABESP is a great play on two vital themes heading into the next decade, I would be remiss not to mention two problems. The biggest issue is that the Brazilian government owns a controlling interest in the company. While that insures the company’s monopoly, it also opens up the possibility that business decisions won’t always have investor’s best interests at heart. Second, while SABESP has generally increased its dividend, the company doesn’t seem too concerned about a steady dividend. Its payouts have been erratic, and the company has sometimes completely "skipped" dividend payments. If you are the type of investor that considers dividends sacrosanct, you may want to take a pass on this stock.
SBS Key Metrics | |
Dividend Yield | 4.0% |
1-year Dividend Growth Rate | N/A |
5-year Dividend Growth Rate | N/A |
Dividend Payout Ratio | 26% |
Return on Equity | 15% |
5-year Total Return | 12.5% |
Analyst Recommendation | BUY |
Ultrapar Participacoes SA (UGP)
Now we come to my highest-conviction stock on this list: Ultrapar Participa. UGP is a major Brazilian holding company involved in the production, distribution and sale of natural gas, petrochemicals and specialty chemicals. This pipeline company has dominant market share of the Brazilian NGL market, and distributes products to industrial enterprises and retails to local consumers in every major population centre.
UGP has grown rapidly through acquisitions, which have provided the company with incredible economies of scale. This stock is the best pure play on the growth of energy infrastructure in Latin America. UGP has paid dividends since 2000, and is rapidly growing its bi-annual dividend, including an awesome 57% increase this year alone.
UGP Key Metrics | |
Dividend Yield | 3.3% |
1-year Dividend Growth Rate | 57% |
5-year Dividend Growth Rate | 14.9% |
Dividend Payout Ratio | 42% |
Return on Equity | 15% |
5-year Total Return | 29.5% |
Analyst Recommendation | STRONG BUY |
SNC-Lavalin Group (SNC)
You may be surprised to see a Canadian company on this list, but SNC-Lavalin is synonymous with infrastructure. The company designs, constructs and operates infrastructure projects around the world. SNC has stated its intention to aggressively expand into emerging markets. Obviously not a pure play on emerging market infrastructure, but already almost a third of SNC’s revenue comes from emerging markets, and this number is growing. It has also provided a very impressive dividend growth rate of over 24% and a total return of over 13% the last five years. SNC trades on the TSX and OTC in U.S. markets.
SNC Key Metrics | |
Dividend Yield | 1.6% |
1-year Dividend Growth Rate | 23.5% |
5-year Dividend Growth Rate | 24.6% |
Dividend Payout Ratio | 21.3% |
Return on Equity | 22.6% |
5-year Total Return | 13.1% |
Analysts Recommendations | Strong Buy |
Conclusion
I believe emerging-market infrastructure provides one of the most exciting opportunities for investors this decade. The stocks I have highlighted give investors access to this theme with lower risk and higher dividend yields than the corresponding ETFs. To this point, my two Brazilian choices have significantly outperformed the Brazilian Infrastructure ETF this year.
Disclosure: I am long SNCAF.PK, UGP, EOC.
