As of the 5th of October, iShares MSCI Brazil Capped ETF (EWZ) had a TTM dividend yield of 3.42%. In this article, I hope to answer if it is possible to create a dividend-focused portfolio with only Brazilian ADR that can outperform EWZ’s dividend yield. My investment thesis is simple; analysts are expecting EPS to grow by over 100% in 2022, and dividends should grow too. For those who don’t know, Brazilian law requires corporations to pay out a minimum of 25% of its earnings to shareholders.
Throughout the course of this article, I will consider interest on equity and dividends as just dividends. To the best of my understanding, interest on equity is treated the same as dividends for U.S. tax purposes.
The stocks mentioned in this article are all Brazilian stocks. Investors are exposed to the Brazilian Real, which has devalued significantly over the past several years. During periods of high market volatility, the correlation between Brazilian equities and the BRL increases, causing investors to lose money at a rate faster than they might normally experience in the United States. Several of the companies mentioned in this article were involved in one of the following political corruption scandals: Operation Car Wash, Operation Weak Meat, and Operation Vegas. It is important that an investor knows and understands the risks before investing in an emerging market.
Dr. Ed Yardeni from Yardeni Research produces a revenues and earnings growth report. This report uses market analysts’ EPS forecasts to produce earnings growth estimates for all MSCI regional indices. According to this report, the MSCI Brazil 25/50 index’s EPS increased by 8.3% in 2019. From 2018 to 2019, EWZ’s dividends increased from $ 1.1053 to $ 1.2059 (9.10%). EWZ’s dividends and MSCI Brazil index’s EPS have a tendency to grow at close to the same rate.
According to the Yardeni report, this year, EWZ’s EPS is expected to decrease by 55.1%. According to the estimates from my model, which uses both market forward dividend yields and historical dividend payments, dividends should decrease by only 41.9%. This year, dividends are down 45.6%, and there are still three months left in the year. I believe that analysts’ estimates are overly bearish as the market doesn’t know how to estimate the adverse effects of the coronavirus. By being overly bearish the market drives down equity prices which pushes up the forward dividend yield which is the advantage I plan to use.
The Yardeni report estimates that MSCI Brazil 25/50 Index’s EPS should increase by 151.4% (2020-2021). I believe these growth estimates are too high because the estimated decrease in EPS in 2020 is to high.
Picking Stocks For The Portfolio
I seldomly use stock screeners, but in this case, I thought it would be easier to use them. I was wrong! After wasting about 30 minutes, I scrapped the information that I got from the stock screeners. Free stock screeners are built to focus on your average day to day blue-chip, well-known stocks. American Depositary Receipts (“ADRs”) are complicated for these screeners as most of the information must be inputted manually. OTC stocks are even worse for stock screeners. Almost one-third of the stocks that I analyzed for this article are both ADRs and listed on the OTC markets, making it even harder for the screeners to do their jobs.
As I said earlier, I started out using stock screeners, and I put the same parameters in all three of them, and they all gave me different information. I ended up using the Brazilian ADR list from this website, and I compiled the financial information myself. Though this is more time-consuming, I believe accuracy is important.
Table 1 – Criteria Used To Select Each Stock
|Criteria||Binomial Test (max is 5)|
|1. Div Yield For Div Paid in 2020||> 0% is 1 < 0% is 0|
|2. Historical Div CAGR (2017 – 2019)||> 0% is 1 < 0% is 0|
|3. Fwd Div Yield (2020/2021/2022)||>= 3% is 1 <3% is 0|
Table 1 provides you with the binomial tests that I ran on each of the thirty-seven companies. These criteria are used to help me screen the stocks that I want to analyze further. If I were creating an index, I would select the stocks that met the index’s criteria and give them a proportional weight in the index. Since my objective is to generate alpha, I will further analyze each stock that was selected.
Figure 1 – Stocks With A Score Of Five
The four companies in Figure 1 scored a five out of five, and they account for almost 11% of the companies analyzed in my model. I plan to invest thirty percent in the companies that scored five out of five. My initial thoughts are to invest 30% in stocks that scored a five, 60% in stocks that scored a 4, and 10% in stocks that scored a 3. My initial estimates show that these weights should produce a forward dividend yield of 6.2% in 2021 and 7.2% in 2022.
Banco do Brasil S.A. (OTCPK:BDORY) is trading at a P/E ratio of a little over 5x, and its current dividend yield is 4.3%. Currently, no Seeking Alpha contributors are analyzing BDORY, but market analysts estimate that the bank’s dividends should decrease at a CAGR of 4.2% (2019 – 2022). Prior to the coronavirus, BDORY’s dividends grew at a CAGR of 52.2% and I feel that dividends will return to pre-covid-19 levels faster than estimated by the market.
Companhia Energetica de Minas Gerais (CIG) has a current dividend yield of 6.7%. According to SA’s Rating Summary, Wall Street analysts are very bullish on CIG with a rating of 4.66 out of 5. Sunset Analysis wrote a bearish article on CIG, stating that CIG suspended its dividends for the year. Unfortunately for Sunset Analysis, CIG’s Board met a few days later and approved a special dividend payment of $0.0143. Market Analysts believe that the company’s dividends will increase by a CAGR of 12.7% during the analysis period. The average forward dividend yield during the period is 6.7%, which is significantly higher than CIG’s 4-year average yield (4.77%).
CPFL Energia S.A. (CPL) has not paid any dividends this year but is expected to pay $ 0.3160 soon (using a BRL of 5.50), giving it a 1.9% TTM dividend yield. Analysts’ projections expect CPL’s dividend to increase by 42.1% during the analysis period. These projections are slightly higher than my estimates, making CPL one of the few companies in this analysis that I believe the market is overvaluing which is why its forward dividend yields are greater than those of other utility stocks in this analysis.
Centrais Elétricas Brasileiras S.A. (“Eletrobrás”) (EBR.B) had a high dividend growth (CAGR 20.8%) between the years of 2017 to 2019, except that the company didn’t pay a dividend in 2018. This makes me wonder if we should consider that and treat CIG as if they scored a four and not a five. My theory is that if the company had paid a dividend in 2018, its 2019 dividend could have been less than what was paid in 2017.
Figure 2 – Stocks With A Score Of Four
Source: Seeking Alpha in orange and MarketScreener in purple
The nine companies in Figure 2 scored a four out of five on my binary test.
Banco Bradesco S.A. (BBD) has a current dividend yield of 1.4% and a TTM P/E ratio of 10.7x. Both Wall Street and SA analysts are bullish on the stock. Individual Trader’s most recent article on the bank says they are bullish because of the growth in digital channels and an improvement in the investment banking side’s profitability. Dividends are expected to decrease at a CAGR of 31.2% and its average forward dividend yield is 3.5%. BBD’s dividends grew at a CAGR of 13.4% and were double that of future forecasts. Compared to the other three bank stocks in this analysis (average dividend decrease of 13.5%), I believe that the market is too bullish on BBD and it could offer investors higher dividend yields.
Banco Santander (“Brasil”) S.A. (BSBR) has a dividend safety, growth, and yield rating of A. Market analysts are neutral on the stock. These same analysts believe that from 2019 to 2022, BSBR’s dividends will decrease at a CAGR of 11.5%. Even with this dividend growth estimate, BSBR’s average forward dividend yield is above 5%. As I mentioned earlier, bank stocks in this analysis are expected to reduce their dividends by 13.5% (“CAGR)” during the analysis period. Banco do Brasil (scored 5 out of 5) and Santander Brasil are expected to be the best performers out of the four banks I am analyzing in this article.
SA analysts do not currently cover Cyrela Brazil Realty S.A. (OTCPK:CYRBY), and market analysts are bullish on the stock. Cyrela did not score five out of five because its 2020 forward dividend yield was below 3%. From 2019 to 2022, market analysts expect that the companies dividend will decrease at a CAGR of 23.5%. CYRBY has a 4-year average yield of 4.36%, and its forward dividend yield for the year 2022 is 4.7%. I feel that Cyrela is trading near its fair value.
Market analysts are neutral on Itaú Unibanco Holding S.A. (ITUB). On SA, ITUB is only covered by one analyst who is bullish on the stock. In the author’s most recent article, he mentioned that he believes the stock is undervalued and is a good way to play on the Brazilian economic recovery. ITUB pays a monthly dividend, and its TTM dividend yield is 6.7%. This year ITUB has already paid $0.2721 in dividends, 354% better than market estimates for the year and 24% better than what analysts believe will occur in 2021. I believe ITUB falls into the categoria of stocks that the market is being overly bullish which is why it has already paid out almost four times the dividends than what was expected.
Wall Street analysts are bullish on Petróleo Brasileiro S.A. (PBR), according to SA’s Rating Summary. Market analysts believe that the company’s dividend will grow at a CAGR of 12.3% over the analysis period. The 2022 dividend yield is almost 5%, while the TTM dividend yield is 1.2%. The company’s 4-year average yield is 0.88%, making me believe that it is undervalued.
Wall Street and Seeking Alpha analysts are very bullish and bullish on Vale S.A. (VALE), respectively. The most recent article on SA about Vale states that the company has a potential upside of around 25% in the short-term (one year). Market analysts believe that Vale’s dividend will increase from $0.2608 (2019) to $0.95 (2022), giving it a 53.9% CAGR.
There is not much information available on Hypera S.A. (OTCPK:HYPMY) and Iochpe-Maxion S.A. (OTCPK:IOCJY). IOCJY’s dividends, according to market analysts, are expected to grow at a CAGR of 108.1% over the next three years. HYPMY’s average FWD dividend yield over the next three years is 4%, making me believe that it is trading below its fair value as its 4-year average yield is 2.39%.
There are many moving pieces in this analysis. The exchange rates I used to convert MarketScreener’s dividend estimates (estimates were in BRL) were R$ 5.25 (2020), R$ 5.00(2021), R$ 4.90(2022), which are market estimates. The exchange rate estimates are in line with my estimates.
My preliminary tests show that my Brazilian Dividend Portfolio should produce a dividend yield of over 7%. Once again, exchange rates could significantly affect this portfolio’s overall return. Even if the portfolio manages to achieve a dividend yield better than 7%, its capital loss could be significantly more than this gain.
I plan to continue studying this idea of a Brazilian Equity Dividend Portfolio, so if you have any suggestions on what you want me to cover in future articles, please comment below.
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Disclosure: I am/we are long UGP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.