China Mobile: Dialing for Dividends

Sep.22.09 | About: China Mobile (CHL)

Summary: For several years, China Mobile (NYSE:CHL) has been a very good and reliable dividend growth stock. However, in 2009 it held its dividend essentially flat, breaking an annual string of increases stretching back several years. While the company has strong financials, a good valuation, and its dividend appears safe, at the present time the company should be considered a watch-list stock rather than a “buy” as a dividend stock.

Type of Company and Stock: In Morningstar’s Style Box, China Mobile is classified as a large value company. China Mobile is the largest mobile carrier in the world, providing wireless voice and value-added services in mainland China and Hong Kong. Its stock is traded on the New York and Hong Kong stock exchanges. It has a current dividend yield of about 3.2%. Its website is accessible here.

Company Story and Strategy: China Mobile is the leading mobile services provider in China and the largest in the world. It has the world’s largest mobile network and largest mobile subscriber base, providing a full range of wireless telecom and related services. It recently received one of three licenses granted by China to offer 3G services.

China Mobile is structured through 32 subsidiaries. The company operates nationwide mobile networks in all 31 provinces, autonomous regions, and directly-administered municipalities in Mainland China and Hong Kong. Its subscriber base exceeds 503 M, with market share exceeding 72% in the China wireless market. It added 16 M customers in Q2, 2009.

There is much more room for growth. Many rural areas of China are not deeply penetrated, and the country’s overall wireless penetration is only about 50%. China Mobile is advancing into un-serviced areas. Financial growth is also available not only through new subscribers, but via aggressive deployment of new 3G services and customized mobile value-added services.

There seems little reason to believe that China Mobile will not remain the dominant provider. Its size gives it superior efficiencies of scale, and its brand is well known. However, it is somewhat handicapped by a mandate to provide 3G services via its home-grown technology standard, while its competitors can utilize mature 3G technologies.

The company is majority-owned by China Mobile (Hong Kong) Group Limited (74% ownership), with the rest publicly owned. In 2007, the company marked the 10th anniversary of its listings on The Stock Exchange of Hong Kong and the New York Stock Exchange (where it trades as ADRs).

In something of a sidelight, the company acquired a 19.9% stake in Phoenix Satellite Television in 2006 to develop value-added services there.

Financials: China Mobile has admirable financials. Its ROE has exceeded 15% since 2000 and currently is about 28%. This has been accomplished with little debt: its debt-to-equity ratio stands at 10% versus an industry average of 280%. The company has a 3-year average revenue growth rate of 19% and 3-year average EPS growth rate of 27%.

In the most recent quarter, Q2 net income was down marginally from Q1, as average monthly phone bills declined 11% while the company added 16M new customers. China Mobile has a strong balance sheet and strong free cash flow to help sustain it through economically volatile periods. Its consensus 5-year earnings growth rate is 16%, which is about the industry average.

China Mobile’s dividend has been made “lumpy” in the past few years because of special dividends. Its regular dividend is paid twice per year, normally in May and August, and that increased steadily from 2005-2008. There was one additional special dividend in 2006, two in 2007, and one in 2008. Total yearly payouts (including the special dividends) increased steadily until 2009. Its regular dividend in 2009 essentially equals its regular payout in 2008, but there is no additional special dividend this year. The regular dividend payout appears to be easily sustainable, as China Mobile’s cash flow has increased steadily for 10 years, and its payout ratio has held steady at 43%. Current yield is about 3.2%.

Stock Performance and Valuation: China Mobile has outperformed the S&P 500 for the trailing 1-, 3-, 5-, and 10-year periods, although it has underperformed in 2009. YTD, total return is about +2% vs. the index’s +18%.

Valuation, using my Easy-Rate™ system, is “Good.” The current P/E ratio of 12 is below the company’s 5-year average of 18. The PEG ratio is 0.8.

Investment Thesis and Conclusion: I have looked here at China Mobile from the perspective of its potential as a long-term dividend growth stock. On that score, it ranks good but not great. Its current yield of 3.2% barely clears my minimum threshold of 3.0%. Its regular dividend certainly seems safe from cuts, but its 2009 dividend essentially was frozen from 2008’s, and actually fell back a little if you count 2008’s special dividend payment. I like to see uninterrupted dividend increases of at least five years. I am keeping China Mobile under strong consideration as a long-term dividend growth play, with special attention on whether it grows its dividend again in 2010.

Disclosure: None.