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The Not Ready for Prime-Time Payers

By Ari Charney on December 9, 2016

When it comes to investing, the right answer to most questions is, “It depends.”

That’s not meant to be a dodge. Rather, it’s an honest assessment that selecting the right stock for your portfolio is often a complicated balancing act between risk and reward.

For instance, at Investing Daily’s Utility Forecaster, we maintain a wish list of potential additions to one of our two portfolios. A simple glance at this wish list would reveal a number of heavy hitters, with about 20 utility, telecom, and infrastructure giants from around the world.

In some cases, these stocks might already be core holdings in your portfolios. But as risk-averse, value-oriented investors, we won’t buy a stock at just any price or under any circumstance. That means being patient—and perhaps even missing the occasional opportunity.

One stock that’s starting to get a lot more interesting is Enel Americas SA (NYSE: ENIA), the Latin American subsidiary of the Italian utility giant Enel SpA (ADR: ENLAY).

We’ve steered clear of Enel Americas because it was in the midst of executing a complicated restructuring that, after about a year-and-a-half, is finally complete. Fittingly enough, the company celebrated this achievement with its debut on the New York Stock Exchange earlier this week.

The company spun off its Chilean operations into Enel Chile SA (NYSE: ENIC), while consolidating operations in Argentina, Brazil, Colombia and Peru, where it generates, transports and distributes power to 15.6 million customers.

One of the attractions of Enel Americas is that in addition to providing international diversification, the stock would also offer exposure to the region’s growing demand for electricity. In the U.S., for instance, electricity demand growth has been weak or declining, while in South America it’s projected to rise 4% annually.

According to the company, Enel Americas is the No. 1 power distributor in Colombia, No. 2 in Peru and Argentina, and operates grids in some of Brazil’s largest metro areas.

Consequently, analysts forecast that ENIA could grow its adjusted earnings per share by nearly 12% annually through 2020, which compares quite favorably to the U.S. electric utility sector’s average of around 5% annually.

Strong earnings growth should flow through to the dividend, which is expected to hit a trough in the coming year, for a yield of about 3.3% on a forward basis and then start rising from there (unlike U.S. and Canadian firms, many foreign companies’ payouts vary from period to period depending on their actual financial performance).

Right now, however, analyst sentiment on the stock has a neutral tilt, at three “buys” and three “holds.” The consensus 12-month target price is $9.56, which suggests potential appreciation of 12.9% above the current share price.

One thing that analysts can’t necessarily model is the extent of parent company Enel’s potential Latin American buying spree. The company is poised to deploy billions of dollars in the U.S. and Latin America to diversify away from Europe, while pushing further into renewables and grid investments. Depending on how they’re executed, these moves could add meaningfully to ENIA’s earnings-growth trajectory.

But parent company Enel is still in the midst of emerging from its own transformation. And the fates of the two companies remain closely intertwined, since Enel owns roughly 60% of ENIA. And Enel has not always done right by its minority shareholders.

Meanwhile, we can’t ignore the fact that two of the four countries ENIA serves are economic basket cases at the moment. Investing in the emerging markets isn’t for the faint of heart, even when you’re talking about utilities.

Still, ENIA bears watching. We’re not quite ready to add it to our wish list, but we’ll be monitoring it closely.


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