What are we looking for?
High-dividend-yielding stocks with big exposure to the Latin American market.
Looking beyond Latin American bonds
Today, we feature another screen from the Brockhouse Cooper economics/strategy team of Pierre Lapointe and Alex Bellefleur in Montreal. They recently generated a screen to identify developed-market stocks that offer both high dividends and high exposure to the growing Latin American economies – as an alternative to playing the Latin American bond market.
The pair were recently struck by the market’s recent insatiable hunger for Latin American government bonds – punctuated by Mexico’s recent unprecedented issue of 100-year bonds, and talk that Brazil might follow suit – as the region continues to show improved fiscal and political stability, impressive growth prospects and attractive interest-rate yields. They fear this frenzy for Latin American bonds may be overheated and may be exposing investors to undue risk.
“Who really knows what the finances of Mexico are going to look like 100 years from now?” Mr. Bellefleur said this week. “We felt investors weren’t really being paid for the risk.”
“We think these exceptionally robust flows into emerging market bonds signal that this asset class is becoming expensive,” they wrote in their report.
“The current strong performance of Latin American sovereign credit is undeniably driven by the improved creditworthiness of these sovereigns, which have weathered the crisis better than developed countries. Yet it is also driven by an insatiable investor appetite for yield,” they said. “We think there is little upside to be had on those bonds in the form of improved credit quality.”
Latin exposure, with income
Mr. Lapointe and Bellefleur believe there’s a better way to play the Latin American investment theme, one that presents better price upside while still offering a strong income stream and limiting exposure to long-term risks in the region. They suggest investing in dividend-paying, large-capitalization stocks that are based in developed countries, yet “derive a significant proportion of their revenues from Latin America.”
They screened for S&P Global 1200 companies based outside of Latin America who get at least 10 per cent of their revenues from the region. The screen also required a minimum dividend yield of 2 per cent, and the dividend had to have increased over the past five years.
The screen revealed 14 names spanning a fairly broad range of countries and sectors. The best combinations of exposure and dividend yield came from a couple of telecom providers, Portugal Telecom of Portugal and Telefonica SA of Spain.
