Published October 6th, 2017
This is a guest contribution by Alberto Maffeis. Alberto Maffeis is a Finance and Strategy consultant for a large Sovereign Fund and as Dividend Income investor he is planning to retire by 2020, enjoying his passion for Asset Management and Stock Valuation. He created the site Dividend for Life to share some “Value” ideas on companies that he trusts.
The USA represents the biggest Stock Market with some of the best brands in the world with experienced management that can all but guarantee long-term success.
However, sometimes these companies are a bit overvalued – even considering potential growth in the coming years. For this reason, my intention today is to introduce a few international names that may have lower valuations, allowing us to diversify our portfolio risk.
To this end, I would like to introduce the following companies:
- Rio Tinto (Australia), the world’s 2nd biggest miner
- Saeta Yield (Spain), small bust fast growing solar farms companies
- Munich Re (Germany), the world’s biggest reinsurer
- Swiss Re (Switzerland), the world’s 2nd biggest reinsurer
- Red Electrica, Spanish utility with 17 years of dividend increase and a 5% yield
International Dividend Stock #1: Rio Tinto (RIO)
Mining companies have been suffering in the last 5-7 years due to the decrease in commodity pricing. They have been deleveraging to reduce costs and risks.
The best in this group is probably Rio Tinto, an 85B USD Australian miner focused in Iron Ore, aluminum and copper, with solid financial position (debt is only 0.6 x EBITDA), large free cash flow and shareholder friendly policies.
Rio Tinto has numerous competitive advantages:
- One of the cheapest producer of Iron Ore (around $14/ton),
- Highest product quality in the market
- Automated operations (driverless trucks and trains extract and bring minerals to the Australian port of Hedland)
- 5/6 tier 1 mines with large reserves for the next coming year
Source: Rio Tinto 2017H1 presentation
This efficiency allowed Rio Tinto to generate plenty of free cash flow, enough to reduce debt by $2B, $1B of share buyback and $2B dividend for the semester. Moreover, free cash flow is expected to grow even further, thanks to:
- Iron Ore, Aluminum and Copper prices are recovering fast lately thanks to better economic growth around the world
- $1.5B additional cost cutting by 2020
- Large new projects coming live in the next years:
- Silvergrass, high margin Australian Iron Ore mine, adding 10mn tons and 500m$ cash flow
- Oyu Tolgoi, world largest Copper reserve in the world and next to China. More than $1B cash flow expected by 2020 and 4B$ expected revenue by 2025
- Amrun, large Bauxite mine (base for Aluminum) with $500m cash flow opportunity in 2019
As mentioned, Rio is in a very solid financial position, after they have decreased Net debt from $27B to $7.5B in the last 3 years. Rio could pay it back with few months of current cash flow.
As debt has been reduced to comfortable levels, top executives are focusing on repaying shareholders. In this year alone Rio Tinto has dedicated $4B to repurchase shares (4.7% of the total capitalization), $4.5 USD in dividends (5.2% dividend yield), plus debt reduction.
Not only is free cash flow expected to reach $10-$12Bn in the coming years (14% Free Cash Flow yield), but Rio Tinto is also planning to sell 2nd tier assets and to distribute additional dividends.
Miners work in a delicate and competitive industry, where the most efficient and best quality companies will be the one surviving any bad cycle. Rio Tinto is one of them
International Dividend Stock #2: Saeta Yield
Saeta is 800m€ Spanish Yieldco, with 900MW in solar and wind farms with a very conservative approach focused on growth despite its 7.8% dividend. It’s targeting 10% growth and considering its small size and its pipeline it is very likely to achieve this growth in the next 10 years.
Moreover, the Catalan referendum (1st October 2017) has added risk to the Spanish economy, creating interesting an opportunity in the stock market.
During the first 6 months 2017, Saeta has added 100MW (+12% YoY) and increased EBITDA +23%, reaching 110m€ and it’s in the process to acquire 144MW by the end of year. Saeta estimates an EBIDTA of 230M€.
In the pipeline, Saeta has a RoFO (right of first offer) of an additional 800MW and ACS (its holding partner) has won a tender for 1.5GW. Altogether, Saeta could have 3GW capacity in the next 7 years (4 times bigger than today).
Of course, part of this growth has been financed with Debt (1,317M€ Net Debt),
Source: Saeta Yield Investor Presentation, slide 32
It is still a manageable position, considering that:
- 5.7x EBITDA
- 4.3% interest cost (total of 75M€)
- Moreover, Saeta dedicates 90M€ of its CAFD to Debt Reduction, allowing more growth in the coming years.
Saeta has a nice dividend of 7.8%, dedicating only 40% of its Operating Cash Flow, because it has an ambitious plan for growth. However, I am expecting dividend to grow slower (3-4% yearly) than EBIDTA allowing to reduce debt faster and purchase more assets.
Saeta not only has a High dividend, but it has the opportunity to double in the next 5-7 years thanks to its conservative policy that allows reduce Debt by 90-120M€ every year.
Saeta Yield is not available in USA, but you can find in Euros with the ticker: SAY.MC
International Dividend Stock #3: Munich RE
Munich Re is the world biggest Reinsurance Company and it is the longest European Dividend Aristocrats (increasing dividends every year since 1970). Warren Buffet has been one of the investors, even though he has been divesting since 2 years ago.
However, it’s a very solid 26B€ company, cheaper than its book value and with a very shareholder friendly practice.
New technology and data mining is allowing insurance to calculate and reduce risk, putting pressure on the reinsurer model. Lately, pricing has been challenging for all reinsurers, reducing margins and working very closely to 100% premium. Moreover, very low interest rates reduced the returns from their investments.
However, after all of this, Munich Re is still very profitable and while it is restructuring its direct insurance business (ERGO), it generates plenty of cash flow.
Munich RE manages 230B€ in investments (largely sovereign bonds 55%) and any interest increase can improve income tremendously (2% increase could generate 5B of additional income)
Munich Re is sitting in a very healthy position with more 30B€ of unrealized gains, 10% more than the total capitalization.
Source: Munich Re – Investor Presentation Sept 2017
267% Solvency II Ratio (40.7B€ reserves) and limited Debt (2.8B€ subordinated and 0.8B€ of Senior debt)
Cash flow reached 3.2B€, where 1.3B€ (5% dividend yield) will be dedicated to dividends, 1B€ share buyback and all the remaining profit is kept to increase investing.
Since 2005, distributed more than 85% of current capitalization.
In the last 10 years, shares have decrease from 215 to 157 (-27% decline).
Long term Munich Re is a very safe dividend income solution and when in the future interest rate increases I won’t be surprised if the dividend could triple again in the next 10 years.
In the USA, it’s available under the ticker: MURGY, MURGF
International Dividend Stock #4: Swiss Re
Swiss Re is the largest Swiss Reinsurer and it is just a bit smaller (based on premiums) than Munich Re. Swiss Re has a very shareholder friendly policy.
Its capitalization 30BCHF is 20% cheaper than its book value (37B CHF), Swiss RE is also supported by extremely solid Solvency II ratio of 262%.
Its investment have reached $114B. Once more, any interest rate increase can generate a substantial profit increase.
A well-diversified business (among Americas, Europe and Asia) is now focusing on capturing natural catastrophe & weather protection ($180B opportunity), while the existing business keeps its combined to around 97%.
262% Solvency II Ratio (51.7B$ reserves) and limited Debt (2.8B€ subordinated and 0.8B€ of Senior debt) make Swiss Re very solid and ready capture additional opportunities.
Since 2012, Swiss Re distributed almost 50% of current capitalization with $14.2B dividend and they are projecting higher dividend and share buyback.
Today Dividend yield is above 5,5%, + $1B has been dedicated to share buyback, while extra cash is available for Growth opportunities.
In the meantime, while interest rates are slowly getting back to normal (3-4%), Swiss Re is repaying shareholders generously via dividends and share buybacks.
In USA, it’s available under the ticker: SSREY
International Dividend Stock #5: Red Electrica
Red Electrica is 9B€ capitalization company that manages the electric grid in Spain. It has one of the best dividend streaks in Europe (17 years) with a current 4.9% dividend and a very shareholder friendly capital allocation policy (+7% growth expected in the next 3 years).
Its main operations are in Spain, but it also expanding in South America.
Many growth projects are expected to start in coming years: from small acquisitions in Spain to new projects in Chile.
Cash flow is close to 1.2B€ and investments should decrease in the coming year to an average of 450M€, so there is space to cover the 450M€ dividends. Free cash flow is close to 800M€
Source: REE FY 2016 Presentation
For being a utility, Red Electrica has a quite conservative debt level (3.2x EBITDA). This allows it to keep growing in its strategic projects and sustain its dividend policy.
Red Electrica has financial support from the market, considering that it just closed a 10 Year bond for 1.065%. Its average cost of Debt is 2.83% on 4.7B€. EBITDA can cover interst 10 times.
Since 2000, Red Electrica has increased its dividends from 0.09 to 0.91€ and the share price moved from 9€ to 17€ (with 1×4 split).
The dividend is a clear focus for Red Electrica and it will keep growing at around 7%, considering only 50% of free cash flow is used for dividends, and operating cash flow is growing faster than dividend increases.
Source: Red Electrica 2016 Presentation
In the last 2 months, Red Electrica’s price has showed some weakness, and coming Catalan referendum could give a very good entry point. Around 16€ (for Spanish ticker: REE.MC), the dividend will be close to 5.7% and growing.
In USA, Red Electrica is listed under the ticker: RDEIY.