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Why Veolia Is Right for Your IRA

This article is part of our Right for Your IRA series, in which Foolish writers each pick a stock or ETF that could be a great fit in a tax-advantaged retirement account.

Are you prepared to retire? According to recent surveys, you aren't. Two-thirds of Americans have less than $50,000 saved up for retirement.

One of the most important tools we have at our disposal to fix this problem is the Individual Retirement Account. The deadline for contributing to your IRA is fast approaching! Both traditional and Roth IRAs offer significant tax advantages that can help you conquer your retirement goals.

While capital gains are never guaranteed, companies will bend over backwards to ensure that a dividend payout continues. That's why IRAs can be a good place for investors to bundle their best dividend ideas. Today I'm offering you my favorite dividend company: Veolia Environnement (NYSE: VE  ) .

A cheap stock with long-term legs
One of the most enticing industries for long-term dividend investors is waste collection. If history is any guide, the need to dispose of large amounts of waste isn't going anywhere anytime soon. In fact, with consumption in emerging economies growing by leaps and bounds, the industry will likely be seeing a heavier workload moving forward.

Here's a quick look at the valuations of four of the bigger global players in the waste-management industry.

Company

Dividend Yield

Forward P/E

Price-to-Sales

Price-to-Book

P/E to Growth

Veolia Environnement 8.9% 21 0.2 0.9 2.4
Waste Management (NYSE: WM  ) 4.1% 14 1.2 2.7 1.6
Republic Services (NYSE: RSG  ) 2.9% 14 1.4 1.5 1.5
American Water Works (NYSE: AWK  ) 2.7% 16 2.2 1.4 1.9

Source: Yahoo! Finance.

These kinds of metrics can leave one bewildered. Veolia offers an amazing dividend and is priced cheaply based on both sales and book value, yet it looks wildly overpriced based on future growth prospects (forward P/E and P/E to growth).

You might think that the competitors are better bets. Waste Management and Republic Services both have a big part of the U.S. trash and recycling market, while American Water Works is one of many water utilities that have seen big opportunities arise lately. But though they're all quality companies, I think Veolia offers more bang for your buck.  So what gives with the screwy metrics?

A little history will help explain the story. From 2003 to 2009, former CEO Henri Proglio went on an ambitious run of expansion and acquisition to make Veolia a monster global force. Though he succeeded in expanding the company's influence to over 70 countries, he also left Veolia crippled under a mountain of debt.

Current CEO Antoine Frerot, however, is tightening the belt of the company -- by exiting close to half of the countries with operations and selling off non-essential divisions of the company. These moves should help clean up the balance sheet.

They will also help Veolia focus on its second major revenue stream (beyond waste collection): water services. If there's one commodity that's going to be more valuable than oil 20 years from now, it's water.

And with the company's recent announcement that it will be providing safe drinking water to the 2.7 million residents of Nagpur, India, for the next 25 years, it's clear that Veolia is serious about being a major player in emerging markets.

But here's the rub...
An investment in Veolia isn't without its risks. If you'd just like to find a stodgy dividend payer you can forget about, Veolia may not be for you. Here's why:

Management issues: Former CEO Proglio -- the one who ran up all the debt -- isn't crazy about his legacy being tarnished. There were rumors about Proglio -- who still sits on Veolia's board -- trying to oust Frerot for someone who favors the ways of old. Those rumors were proven false for now, but any change in the executive suite would be a surefire sign to re-evaluate this investment.

Failure to execute restructuring: Veolia is currently trying to sell off its transportation business to pay off debt and focus more on water services in emerging markets like Nagpur. If, however, the company can't alleviate debt problems, or loses out to competitors in Asia, the future may not be so bright.

Tax issues: Finally, because Veolia is based in France, there are some tax issues to deal with -- even through your IRA. As our own dividend guru James Early states, "France imposes a 15% withholding on U.S.-bound dividends." That might leaving you wondering where the advantage is in putting this in an IRA at all.

To that, there are two things to consider. The first is political. Recently, President Obama said that for some high earners, the dividend tax rate may soon get taxed as ordinary income, causing effective rates to almost triple. If this were to happen, a 15% foreign rate wouldn't seem bad at all.

Secondly, if Veolia is able to execute on its restructuring plans, there's significant potential for capital appreciation. If you put Veolia shares into a Roth IRA, all of those gains will be yours to keep -- the government can't touch them.

Make smart decisions now
I have personally thrown my money and my All-Star CAPS profile behind Veolia. Frerot has recently slimmed down his executive team to help him accomplish the company's goals, and I'm excited to see what happens.

If you'd like further dividend ideas that could find a place in your retirement portfolio, I suggest you check out our special free report on the matter: "Secure Your Future With 9 Rock-Solid Dividend Stocks." Inside you'll get the names of nine dividend payers our analysts are very excited about. Get your copy of the report today, absolutely free!

See what else our Foolish writers would add to an IRA; click back to the series intro for links to the entire series.

Fool contributor Brian Stoffel owns shares of Veolia. You can follow him on Twitter, where he goes by TMFStoffel.

The Motley Fool owns shares of Waste Management. Motley Fool newsletter services have recommended buying shares of Waste Management, Republic Services, and Veolia Environnement, and writing a covered strangle position in Waste Management. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2012, at 1:30 PM, TMFCheesehead wrote:

    FYI: The metrics for VE were as of early last week when the piece was submitted. The stock actually has more enticing numbers now, as it's taken a fall (with the rest of the market, too) as of late.

    Brian Stoffel

  • Report this Comment On April 14, 2012, at 12:35 AM, dcfoolz wrote:

    VE might be a good buy, but is it really best for US taxpayers to have it in their IRA? Won't we still be responsible for the 20% French dividend tax even though it is held in a US IRA? Can we still claim the foreign dividend tax credit if this stock is held in a tax deferred account?

    I have deliberately avoided holding foreign dividend-paying stocks in my IRA because I thought I would not gain the same tax advantage as holding US dividend stocks in an IRA.

    Can someone at Fool give a definitive answer to this?

  • Report this Comment On April 14, 2012, at 1:36 AM, TMFCheesehead wrote:

    dcfoolz-

    This is directly addressed in the 3rd and 4th-to-last paragraphs.

    Brian Stoffel

  • Report this Comment On April 15, 2012, at 11:34 PM, dcfoolz wrote:

    Brian Stoffel (a.k.a. TMFCheesehead):

    I used to receive (James Early's) TMF Income Investor newsletter, and in Fall 2011, it indicated that France imposed a 25% dividend withholding tax and recommended that VE be held in a "Taxable" brokerage account.

    I recently got my TOT dividend payment in my taxable Brokerage acct and it had a 30% witholding. [Perhaps France has raised its tax regime since Nov 2011.] I can recover some of this amount next April 15 2012 as a foreign tax credit from the IRS, thereby paying only 15% dividend tax on the French stock.

    I am not an investment or tax expert, but I hope all other Fools will carefully look into this matter before following the advice of putting VE in an IRA. I do not believe we can recover the withholding tax on Foreign dividends held in IRAs, as can be done for foreign stocks held in taxable accounts.

    If we have other Fools who might be more knowledgeable on these matters, please add your comments.

    Regarding your thesis that VE might be good for capital appreciation, I thank you for your opinion.

    Fool-on!

    Scott L

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