A.F.P. Provida

AFP Provida (PVD) is the ADR for one of Chile’s largest pension plan investment managers. Chile created a privatized personalized pension plan system in 1980. It mandates contributions from workers (10% of pay) and the pension system then manages those assets and provides annuities on retirement. Somewhat akin to 401k plans except with a broader scope. Creating a private domestic savings/investment pool — and limiting/capping the unfunded liability of state-run pension systems is a major reason why Chile is now a very stable country financially, can fund its growth internally with a very high savings rate (>20%) and has one of the highest sovereign bond ratings (default likelihood lower than France/UK). That it also creates an interesting investment opportunity is pretty good too.

Valuation – (PB-1.7, PS-2.6, PCF-8, PE-13, Div Yield~8%) – is in the range of its valuations over the last 10 years — but far lower (roughly half) than valuations of comparable asset managers in the US. Considering that its assets under management are far more predictable – and represent a play on growth of commodity prices (an important part of Chile’s economy), the long-term rising income of Chile, and potentially even growth opportunities in other parts of the world as socialized pension systems crack – this doesn’t make sense.

Management – Earns excellent grades for producing sales/earnings growth (8% annualized sales and 14% annualized earnings growth over the last 10 years), operating efficiency, margins, return on capital. Has a clean balance sheet. Distributes roughly 33%-50% of its free cash flow as dividends. The operating model is not capital-intensive regarding growth/maintenance. Overall – better run than almost any US company – with lower CEO pay.

Shareholders – The majority shareholder is the Chilean subsidiary of a Spanish bank – Banco Bilbao Vizcaya Argentaria (BBVA on the NYSE). Most remaining shares are owned in Chile or by European institutions. The few American owners are value-oriented, income-oriented, or emerging-markets-oriented. No coverage on Wall St. Market cap is about $900 million. Daily trading volume is anemic so not a short-term trade and technicals are a bit meaningless. Dividend probably doesn’t protect downside (since a market swoon would obviously affect PVD assets under management) but there really are multiple catalysts for the stock – and dividend does provide more reason to wait for them.

Risks – Obviously this company’s business model is a creation of government so there is political risk. eg – Argentina (which has no private pension system) decided to steal everyone’s pensions a year ago in order to provide the government with revenues. Chile had socialist/center-left governments after Pinochet — and they made noises about “how much better it would be if pensions were resocialized” – esp during the 2008 market downturn. Interestingly however, 30 years of having “personal” retirement accounts also created a strong opposition among Chileans to anything more than reform/tweaking. The current President of Chile is the brother of the man who created the privatized pension system in 1980 (under the tutelage of Milton Friedman). The most likely reform now is that the system will be legislatively expanded to account for the different sorts of employment practices (eg more part-timers) since 1980.

Overall, a very very interesting value play – with a nice dividend and quite a few catalysts for share price appreciation even in the event of a bad overall market in other parts of the world.

[On edit] Dividends are subject to a 20% Chilean withholding tax that is automatically withheld. Dividend yield of 8% or so is net of that tax — but claiming the Chile tax as a tax credit for US taxes is probably a bit of PITA.

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