Eletrobras $5.4 Billion Dividend Stuck on Politics: Week Ahead

Centrais Eletricas Brasileiras SA, Latin America’s largest utility, is delaying a 10 billion real ($5.4 billion) dividend as it negotiates timing of the payment with Brazil’s government, its biggest shareholder.

The Rio de Janeiro-based company held back the dividends, which date as far back as the 1970s, to invest in projects such as the construction of the Itaipu hydroelectric dam along the border with Paraguay. Each voting share is expected to receive 10 reais in dividends.

“To pay all the dividends, we still need money from the government,” Chief Financial Officer Astrogildo Quental said in an Aug. 14 interview from Rio de Janeiro. “We’re in talks with the Treasury to find a solution.”

The delay underscores the risks for shareholders in state- run companies, said Edison Garcia, superintendent of Brazil’s Minority Shareholders Association, which represents investors with about 300 billion reais in assets. Nine of the 58 companies in the Bovespa stock index are controlled by the federal or local governments. Among them are Petroleo Brasileiro SA, Cia. Energetica de Minas Gerais and Banco do Brasil SA.

“This situation creates an environment of legal doubt for people investing in Brazilian state-controlled companies,” Garcia said. “The Brazilian Treasury must find a way to pay its obligations.”

Quental may address the dividend issue as early as this week at meetings with investors and analysts after Eletrobras, as the company is known, reports second-quarter earnings. The utility will report results by tomorrow, he said, after an Aug. 13 release was delayed because of operational problems.

Ruling

Eletrobras can’t use its cash to pay dividends before a decision by the government, which owns 80 percent of voting shares, Chief Executive Officer Jose Muniz told reporters in Rio last week. The government is discussing how and when to make the payment as it would count as an expenditure in the budget.

Brazil’s securities regulator, Comissao de Valores Mobiliarios, ruled in 2008 that Eletrobras acted irregularly by not paying investors. The agency, known as CVM, can’t order the company to pay, so it started a separate investigation into the role of company executives in the dividend case.

“We aren’t aware of the ongoing CVM’s investigation,” Quental said. “We don’t plan to pay shareholders because of the CVM ruling. We’ve planned to pay them for a long time,” he said, adding Eletrobras will cooperate with regulators.

Any payment probably would involve a combination of cash and stock, likely altering the size of the stakes owned by the government and minority investors, Muniz said. A Brazilian Treasury spokeswoman in Brasilia declined to comment.

Courts

Minority shareholders probably won’t be paid unless the company is ordered by a court, said Daniel Brazil, a director for the Porto Alegre-based law firm Edison Freitas de Siqueira Advogados, which represents investors claiming about 3 billion reais from Eletrobras, including holders of convertible debt.

“We expect to have a return within a year,” Freitas said.

Eletrobras voting shares climbed 7 percent this year to 27.67 reais on Aug. 14, lagging behind a 51 percent gain in the benchmark Bovespa stock index. American depositary receipts have climbed 34 percent. Each ADR represents one ordinary share.

The lack of details on the dividend payment may prevent the stock from rising further, said Rosangela Ribeiro, an analyst at SLW Corretora in Sao Paulo.

“The dividend is a positive driver which has supported the stock, but investors may lose their patience if the company doesn’t say soon how and when it plans to pay,” she said.

Markets

The Bovespa index rose 0.6 percent to 56,638 last week, led by Gol Linhas Aereas Inteligentes SA, which climbed 16 percent, and Rossi Residencial SA, which gained 10 percent. Redecard SA fell the most in the gauge with a 9 percent drop.

The yield on the local-currency zero-coupon bonds due January 2010 fell 8 basis points, or 0.08 percentage point, to 8.651 percent. Brazil’s real declined 1.5 percent to 1.8484 per U.S. dollar.