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Stock Strategist Industry Reports

Head South of the Border for Utilities With Growth, Yield, and Moats

We think Latin America holds better investment opportunities than its northern neighbor.

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We are enthusiastic about the opportunities that Latin American utilities present to investors relative to their U.S. utilities peers. While we forecast U.S. utilities to experience anemic 1% annual electricity sales growth over the next few years, faster population growth and wealth creation in South America should drive premium demand growth rates. We think concerns tied to slowing economic growth in Brazil and other South American countries create an opportunity for longer-term investors to capture this growth at discounted levels.

The South American utilities we cover have the greatest exposure to the Brazilian and Chilean economies. Over the past three years, Brazil and Chile have grown at an average GDP of 3.6% and 3.4%, respectively. The U.S. Energy Information Administration's prediction that South American economies will grow 3.1% through 2035 syncs up well with our annual electricity demand growth expectation of 3%-4% across the continent. There may be some near-term risk that infrastructure projects are delayed or electricity demand growth falls short of our assumptions, given poor economic data as of late--Brazil's GDP grew just 2.8% in 2011 and industrial production fell 3.4% in January. However, we think this risk is immaterial to these companies' long-term fundamental outlook.

Andrew Bischof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.