Administradora de Fondos de Pen (PVD:NYSE)
Per share values in UD$ 9-27-2011:
Market value $58.55
Cash & Investments $ 3.32
Enterprise value $55.23
Dividend rate 10.80 %
Durig Capital seeks out quality high yielding global investments, often denominated in foreign currencies, for our International clients. As a result of these efforts, we have identified Administradora de Fondos de Pen as a selection for their investment portfolio.
While scouring the globe for good economies and quality high yield bonds, a prior review of a Chilean short term bond revealed that Chile has one of the world’s best overall economies. Upon reviewing our previous bond report, we believe that you will see the possibility that over time, Chile may have a superior currency due their strong economic and financial market environment. Realizing that Chile is a desirable country to invest in, we choose a Chilean based oligopoly that brings together both an exposure to the Chile economy and a very high dividend rate.
Administradora de Fondos de Pen operates as an international oligopoly in the privatization of the pension system in Chile, and has become such a global strong example of how a country can successfully provide citizens with retirement security. It is increasingly being referred to as an exemplary model of success by pundits calling for changes to the US social security system.
Chile privatized its social security system in 1981 as part of a move lead by Milton Freedman towards a free economy, creating what are called administradora de fondos de pensiones, or AFPs. The AFPs are private companies that manage citizen’s retirement funds and invest in equity markets in the effort to achieve proper returns. Chilean citizens have a fixed percent of their paycheck automatically deducted each month and sent to their selected AFP. This mandated funding helps the AFP’s plan and achieve positive monthly money inflows.
The AFPs are required by law to be single-purpose companies authorized to provide the following services:
- Collection and management of contributions made by participants.
- Investments of participants’ contributions in pension funds managed by the AFP.
- Provide life and disability benefits for participants.
- Provide a senior pension for participants.
Strong Balance Sheet
The Administradora de Fondos de Pensiones Provida S.A. or Provida has the dominant position AFP in Chile. It has a strong balance sheet with over 72 million in cash and less that 1 million in debt. They have very little need for capital investments so they pay a whopping 10.80 percent dividend. (Even though Chile taxes this dividend, the Foreign tax credit provides a way for US citizens to reduce or eliminate that taxation.)
The success of Chile’s national retirement system has increased their citizen’s savings rate to 26%, while at the same time help re-investment in the country, which has been able to achieve growth of 6% in GDP.
Provida has evidenced substantial growth through both acquisitions and an organic increase in market share, moving from 29% in 1990 to 41% in 2010 in terms of participants, and from 20% to 30% in 2010 in terms of total assets under management.
- Change in AFP Laws.
- Dividend Policy.
- Chilean and South American Economy.
1. Change in AFP Laws.
Provida has gained an oligopolistic economy of scale, which is driven by Chilean and South American laws. If that governments change the structures of the retirements in those countries it could greatly effect the overall profitability of this single purpose company. Given the AFP is regarded as so successful that there has been talk of the United States utilizing a similar model to correct it’s Social Security woes, this AFP’s example of superior stewardship appears more likely to be replicated than discarded.
2. Dividend Policy.
They have had a consistent dividend policy that one could fully expect moving forward. They have paid a rate since 1996 with a partial interruption during the crash of 2008-9. They pay a floating rate dividend twice a year, meaning that over time the current rate will most likely increase or decrease from the current rate depending upon their overall financial economic forecast and internal execution.
3. Chilean and South American Economy.
The Chilean economy is ranked as an upper-middle income economy by the World Bank and is one of South America’s most stable and prosperous nations. This is a country that is somewhat dependent on copper and mineral mining, which results in the currency having a higher beta. The Stanford Sovereign Fiscal Responsibilty Index (SFRI) ranked Chile in a strong 7th place position, considerably better then 28th placed United States.
We have reviewed a number of high yield, dividend paying investments that are domained in Chile and/or denominated in the Chilean peso in order to help protect our US clients from possible continued devaluations of the US dollar. In Povida we find a strong, financially well positioned company that could possibly increase its dividend, even though its current high yield is above that of benchmark bonds. Knowing that the core operations are very profitable and that they are a repeatable required service, an overall consideration of the cash, profits and cash flow, and domicile in a well managed currency compels us to placed it as a core position in our Investment Growth & Income Portfolio.
Durig Capital and its clients currently do have positions in PVD.
Always putting your interests first,
Financial Investment Advisor
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