Cemig: A Solid Pick For Dividends In Brazil

Core Viewpoint - Cemig, a state-owned electricity company in Brazil, demonstrates strong operational efficiency and financial stability, making it an attractive option for dividend-seeking investors despite governance risks associated with its state ownership [1][10][13]. Financial Performance - In Q2, Cemig's consolidated net revenue increased by 7% year-over-year, driven by tariff adjustments of 7.4% for distribution and 5.4% for transmission [3][4]. - The company's recurring EBITDA rose by 2% to R$1.9 billion, while recurring net income decreased by 6.6$3.45 billion, indicating strong cash generation capabilities [4]. Investment Plans - Cemig plans to invest R$6.2 billion by 2024, with R$2.4 billion already invested, focusing on modernization and maintenance of the electric system [5][6]. - The investment plan for 2024-2028 totals R$35.6 billion, primarily allocated to regulated investments, which are predictable and less likely to face regulatory rejection [6]. Dividend Distribution - The company maintains a healthy dividend distribution strategy, with a current dividend yield of 6.1% and a payout ratio below 60% [9][12]. - Cemig's net debt to recurring EBITDA ratio stands at 1.02x, allowing for sustainable dividend payments while managing debt effectively [7][8]. Valuation - Cemig's stock is currently trading at attractive multiples, with a price-to-earnings ratio of 5.5x and a forward EV/EBITDA of 5.2x, both better than the sector median [9][10]. - Despite governance risks, the company's valuation remains appealing, with a forward price-to-earnings ratio of 7.3x, slightly below its 10-year average of 7.8x [10][12]. Governance and Risks - Governance risks are highlighted due to significant state ownership, with 50.9% of shares held by the State of Minas Gerais, which may impact investor confidence [10][11]. - The company has shown resilience in operations, but external factors such as macroeconomic conditions and regulatory changes pose potential risks [14].