Amp Up Your Income with Comphania Energetica de Minas Gerais (NYSE ADR: CIG)

Email
    Text size
You may never have heard of Comphania Energetica de Minas Gerais (NYSE ADR: CIG).

But this Brazil-based electric utilities company could be your key to unlocking profits - and income - at a time when much of the developed world is mired in stagflation.

So let's buy Comphania Energetica de Minas Gerais (**).

It's not a difficult decision when you look at the global market and see that there aren't many trustworthy investments in the United States and Europe.

The non-stop news flow out of Europe has wrecked investor confidence. The market now is pricing in haircuts on European sovereign debt. And this process has driven down yields in Western developed nations, as investors fear government default.

You only have to look at what bond yields are in the United States and Germany, compared to other nations like Ireland or Greece, to see the real fear that exists in the world today. Two-year Greek debt is trading with a 35% yield -- not that long ago it was below 10%.

Still, that doesn't exactly make the dollar a safe-haven.

With so much acrimony over the debt ceiling, the U.S. is threatening a temporary default on its debt payments. The U.S. Federal Reserve meanwhile is keeping interest rates at artificially low levels in an effort to stimulate economic growth. That means the U.S. central bank is essentially punishing people who are retired and need to live off the cash flow from their savings and retirement funds.

Indeed, millions of retired people who rely on such fixed-income investments have been hurt by the actions taken by central banks - not just in the United States, but Japan and Europe, as well.

Of course, that's not to say all investors have been punished.

There are global investors - with an eye toward maintaining their cash flow from investments - that have figured out how to meet their cash flow needs and escape from the real negative rates offered in the developed markets.

The thing to remember is that the nature of risk in developed nations differs from the nature of risk in developing nations.

You see, we have a bifurcated global economy, with developed nations in stagnation and developing nations experiencing economic growth and inflationary issues.

So let me put it this way: If you need to live off cash flow from your investments, it is long past time to switch your focus from investments in nations with negative real rates to nations experiencing real organic growth.

Brazil and its utility companies are a great example of this, which brings us to Comphania Energetica de Minas Gerais.

Comphania Energetica de Minas Gerais

Brazil is experiencing organic growth in electricity demand. This sector pays real cash flow, while giving an investor access to a dynamic market.

A quick look at Comphania Energetica de Minas Gerais shows the company has:

  • A vast array of renewable energy plants.
  • A Price/Earnings (P/E) ratio of 9.27.
  • And a 5.4% dividend yield.
One of the reasons I like Comphania Energetica de Minas Gerais is its backbone of 54 hydroelectric plants. These make up an amazing portfolio of low-cost electrical generation assets that includes three thermal plants and two wind farms. This gives the company a real edge over its competitors, who have to buy and consume hydrocarbons.

The hydro plants provide a great base load system, with wind and thermal energy available for peak usage demand.

Comphania Energetica de Minas Gerais has a market cap of $13.6 billion with an enterprise value of $19.88 billion. This helped the company generate $8.49 billion in revenue in the trailing 12 months. That led to a gross profit of $2.75 billion over that period.
That's not too shabby, when you are also getting capital appreciation and a nice cash kicker.
The stock has pulled back over the past few days, and at $20.15, is currently sitting just under its 52-week high of $21.09. But that only means investors now have a better entry point than they did a few weeks ago.

Furthermore, even though the stock is near its 52-week high, its P/E is still in single digits at 9.27.

It also pays a 5.4% yield, which provides investors a real return on their investment. I also expect that dividend will grow - especially if the U.S. dollar continues to weaken against the Brazilian real. This hidden sweetener allows American investors to benefit from the devaluation of the U.S. dollar rather than be stung by it.

Action to Take: "Buy" Comphania Energetica de Minas Gerais. (NYSE: CIG) (**).
Let's buy our position at market. I would look at this as a long-term holding. This is the first in a series of high-yielding global income investment ideas we will be discussing here at "Buy, Sell or Hold."
If you need to generate extra cash flow, besides the 5.4% yield the stock already generates, you might consider picking up your full position now and then writing covered calls on the stock.
(**) Special Note of Disclosure: Jack Barnes has no interest in Comphania Energetica de Minas Gerais. (NYSE: CIG).
About the Writer: Columnist Jack Barnes started his career at Franklin Templeton in 1997. He started out in the company's fund-information department - just as the Asian contagion infected the Asian tiger countries.

Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.

Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Newmont Mining corp. (NYSE: NEM).


News and Related Story Links: