3 Chilean Value Stocks With Fat Dividend Yields
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chile is the most developed economy in South America, with a robust and liquid equities market as well as the highest GDP per capita on the continent. Given Chile’s long track record of privatization, moderate inflation, and fiscal soundness (which has resulted in the highest sovereign credit rating among South American nations), it represents a relatively safer destination for foreign investment dollars than more volatile economies in the regions such as Argentina or Peru.
In this article, I will highlight three Chilean stocks in the financial sector with fat dividend yields and sustainable business models, which could represent attractive ways for investors to establish a foothold in the Chilean market.
Investing in Chile’s social security
The first high-yield stock we will examine is Administradora de Fondos de Pensiones Provida (NYSE: PVD). Administradora is one of a handful of investment management companies tasked with handling Chile’s equivalent of our Social Security system. Unlike the U.S., Chile has privatized its social security program and has mandated its citizens to invest a certain portion of their wages with government-endorsed asset management firms such as Administradora to help cover their future retirement income needs.
As one can imagine, this regulatory arrangement works out very nicely for Administradora, as it is essentially guaranteed a steady stream of asset inflows to invest, and therefore, can steadily grow its fee income as Administradora's assets under management (AUM) grow over a long time horizon (although Administradora's AUM can certainly decrease over shorter time horizons due to market declines).
As a result of its strong competitive position, Administradora has been able to grow its earnings per share more than three-fold during the past decade. Administradora generated earnings per share of more than 4,700 pesos per ADR in 2012 (equivalent to roughly USD 9.70 per ADR) compared to approximately 1,400 pesos per ADR in 2003.
More notably, Administradora's most recently issued dividend was $5.45 per ADR in May 2013. Since Administradora issues dividends on a semi-annual basis, the firm’s projected annualized dividend yield, given its recent share price around $86 per ADR, would be more than 12%, which ranks as one of the highest dividend yields investors will see, especially from a strongly positioned company such as Administradora.
Unfortunately for investors, Administradora's fat dividends won’t be issued for much longer, as U.S. life insurer MetLife agreed to purchase the company in February 2013. Once the deal closes, Administradora will likely not be issuing any more regular dividends, although management still plans to pay out a one-time special dividend before it officially becomes a part of MetLife.
Chilean banks offers growth and income
The other high-yield Chilean stocks we will examine are Banco Santander-Chile (NYSE: BSAC) and Banco de Chile (NYSE: BCH), which are Chile’s largest and second-largest banks, respectively. Banco de Chile is a full-service integrated bank that has enjoyed a history of rapid growth, with earnings per ADR growing more than 300% during the past decade. The company also offers a compelling dividend yield of roughly 4.1% based on the $3.39 in dividends per ADR that Banco de Chile has paid out so far in 2013.
Chile’s banking system is more conservative than those of most Latin American economies, with government-mandated reserve ratios that are similar to the mandates found in the U.S. system. In its 2011 report on the Chilean banking system, the International Monetary Fund described Chilean banks as being “well-capitalized, liquid, and highly profitable.”
Given Banco de Chile's track record of strong earnings growth, as well as the concentrated nature of the Chilean banking industry that gives existing players such as Banco de Chile significant pricing power, I would not be surprised to see Banco de Chile continue to increase its earnings and dividends at a healthy clip, providing investors with both present yield and future growth.
Banco de Chile's closest peer is perhaps Banco Santander-Chile, which is the largest bank in Chile. While Banco Santander-Chile hasn’t grown its earnings quite as fast as Banco de Chile, with earnings per ADR increasing roughly two-fold over the past decade, the company still offers investors reasonable growth as well as a decent dividend of its own at roughly 4.5% (based on the $1.05 per ADR that Banco Santander-Chile has paid out to investors so far in 2013).
Looking at price to earnings ratios, Banco Santander-Chile shares were trading at 15.3 times 2012 earnings as of market close on July 16, 2013. In comparison, at market close on July 16, Banco de Chile was trading at 13 times 2012 earnings.
I believe both Banco Santander-Chile and Banco de Chile are solid banks that should help investors gain exposure to the relatively stable Chilean equities market as well as hefty dividend yields well in excess of 4% for both stocks. The two Chilean banks also stand to benefit from the concentrated nature of the Chilean banking industry, given that they are the two largest banks in the country.
I slightly prefer Banco de Chile over Banco Santander-Chile given its stronger growth track record, as well as a lower price to earnings ratio, but Banco Santander-Chile offers a slightly higher current dividend yield. Chilean asset management firm Administradora offers a superior dividend yield to both Chilean banks, but investors have already missed the boat on Administradora as the company’s acquisition by MetLife will soon close, thereby halting Administradora's stream of hefty dividend checks.
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John Park has a long position in PVD. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!