Ultrapar Participacoes (UGP)
is a stock for investors looking for a window to Brazilian consumers yet one that is not heavily influenced by global financial currents. As with all Brazilian ADR shares, however, investors should be aware of how volatility and currency valuations in the Brazilian market affect U.S. dollar investments.
Ultrapar’s revenues are generated from four business segments. The largest division is the company's chain of retail gas stations under the Ipranga brand. Other segments include retail propane gas sales, specialty chemical sales focused on ethylene oxide derivatives, and bulk liquid storage.
For the second quarter of 2011, Ultrapar reported revenue growth of 17 percent compared to a year earlier. Net income increased by 12 percent. The earnings release presentation noted the quarter marked the 20th consecutive quarter of EBIDTA growth.
The retail gas stations produce about 60 percent of the company revenues and EBIDTA. Second quarter results show how the growth of the Brazilian economy produces positive results on this most basic of retail products. Diesel fuel sales made up 56 percent of sales and sales volume increased 10 percent, year-over-year.
Other fuel sales — including gasoline, ethanol and natural gas — increased 7 percent on an 8 percent growth of private vehicles in Brazil.
Strong dividend policy
Ultrapar typically pays out approximately 60 percent of net income as dividends to shareholders. The company recently converted all preferred shares to common shares. However, both share classes had been receiving dividends at the same rate.
Dividends are declared semi-annually. Ultrapar provided a 3.6 percent yield based on the most recent payout. Dividends are paid in March and August.
The multi-year strengthening of the Brazilian Real against the U.S. dollar has provided a boost in the returns to U.S. ADR investors. A reversal to a strengthening dollar against the real would be a negative for the U.S. share price.
Another factor investors should be aware of is the much higher level of volatility on the Brazilian stock exchange. Over the last several years annual market returns have ranged from a 60 percent loss to triple-digit gains.
The company next reports on Nov. 10.
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