China Mobile: Dialing for Dividends

Summary: For several years, China Mobile (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.

Comments

[notsosmart:]

all well & good if you can trust the chinese? these folks play by different rules(as does russia) & the goal posts are moved to their advantage at any time. its tough enough here to figure out what our scoundrels & crooks are cooking up next to fleece the sheeples.

Sep 22 10:21 AM

[Susan Weerts:]

Thu user data in August showed that China moblie beats its competitives and attracted 5.26mil new customers, which put its total users at 503 million.

Sep 22 10:38 AM

[jimmy smith:]

the stock would be a good buy in around $48/ADR (close to today's prices)... IF... it was based in the US. but since its based in China, you've got to have some type of "Chinese discount" due to the political risks.

it was just last year that the gov came into CHL and decided to willy-nilly "rotate" CEO's amongst the various phone companies! an unheard of activity observed in the West. can you see the results? yes! CHL's stock has stagnated while its rivals have surged.

due to this kind of governmental tampering, i'd want a sizable margin of safety to invest in this firm. i'd be a buyer in the low 40's.

Sep 22 10:57 AM

[notsosmart:]

the margin you need is anybodies guess.different business/gov. model.

Sep 22 12:53 PM

[FinanceManiac:]

I agree with Jimmy Smith, in that they are quite a risk, but if they were in the low 40s I would be interested also. However, I don't know if I could put any type of Long-Term Investment in China that I did not have some type of guarantee that Government intervention would NOT occur. And since that's pretty much impossible...

I ran across another good blog on China called the China Economic Scan @:

worldmarketmedia.com/h...

Looks like they can provide steady info on happenings in China if you're interested.

Sep 22 04:13 PM

[Paul Harper:]

money is being ploughed into 3G, hence no dividend, also on a funadamental, but extremely important level, CHL runs on China's own home grown 3G standard (TD-SCDMA)
In other words, it will get preferential treatment from the Ministry of Communications, against CHU / CHA who use dirty Western technology GSM / WCDMA.

Sep 22 05:40 PM

[Low Sweat I...:]

I enjoyed both the substance and the presentation of this article. I own CHL, and believe it is probably a very good candidate for sustained increases in its regular dividend.

It is true that CHL intentionally held its payout ratio steady at 43% during 2009, while certainly knowing this would result in a flat dividend payment. Both the earnings and the dividend increased about 1% in the first half, in local currency. It was a disappointing outcome in tough year for dividends generally.

But in discussing the flat 2009 payout ratio, CHL reiterated its commitment to a long-term “steadily rising” dividend as an important component of creating shareholder value.

Given their potential for continued business growth, it seems very likely CHL will be able to deliver on their dividend growth intentions.

As far as the Communist politics go, no doubt that adds some risk. But the Chinese are also meat-eating global capitalists, so for issues affecting outside investors they seem more likely to tweak than to thrash.

Sep 22 08:26 PM

[Peter Medved:]

Politics aside, it's an ADR ... am not sure that most of the commenters on Chinese stocks are aware of what an ADR/S/N actually is.

Sep 23 08:57 AM