The world economy is entering a precarious phase, as the eurozone sovereign debt crisis and developing recession cast a dark cloud over the global economy. In its latest China Economic Outlook, published in February 2012, the International Monetary Fund (IMF) predicts that if the "Euro area experiences a sharp recession, China's growth rate will drop abruptly." The IMF emphasizes that "a storm emanating from Europe would hit China hard."
Any marked slowdown in China's economic growth would deliver a blow to the top and bottom lines of many multinational companies selling products and services to China. According to Morgan Stanley, Asia as a whole accounts for only about 5.2% of total sales of the companies making up the S&P500 index. The portion of revenues attributed to China alone is surely lower than that percentage. However, some companies derive substantial shares of their total revenues from China. Those companies are at risk of losing sales from a possible sharp deceleration or a "hard landing" of the Chinese economy. Here are five U.S.-based dividend-paying companies with sizable exposures to the Chinese market.
Las Vegas Sands (LVS) is a $35.2 billion company by market capitalization. The resort and casino operator has a large revenue exposure to Macao (CHINA), from which it derives about 51% of its total revenue. The company owns Sands Macao, The Venetian Macao, and Four Season Hotel Macao offering gambling and entertainment, lodging, and retail and dining services in this special administrative region of China. Las Vegas Sands works in a highly cyclical industry that is sensitive to changes in the economic environment. During the 2008-2009 financial crisis both its revenue and earnings sank.
Las Vegas Sands pays a dividend yielding 2.10% on a payout ratio of 54%. The company's peer Wynn Resorts (WYNN) pays a dividend yielding 1.90%, while competitor MGM Resorts International (MGM) does not pay any dividends. The company has seen strong revenue growth from its Macao facilities, rising overall by 36.5% annually, on average, over the past five years. Assuming a robust global recovery and vibrant growth in China, analysts are forecasting a 31.3% growth in earnings per share each year for the next five years. This rate of growth is 6.6 times faster than that reported for the past five years. A notable slowdown in China would surely lead to much slower revenue and earnings growth. Still, guru fund manager Andreas Halvorsen is bullish about the stock.
Cliffs Natural Resources (CLF) is a natural resources company engaged in iron ore and coal mining, with exposure to the steel and power generation industries. The company has $7.2 billion in market capitalization. Cliffs Natural Resources derives some 31% of its total sales from China. The company's annual revenue growth averaged 29% a year over the past five years. In the latest quarter, sales increased by a relatively modest 6.9% year-over-year. The company expects that China's "march toward urbanization" is unlikely to slow dramatically, which will support a strong steel demand, and thus the demand for iron in China. Analysts are not really bullish about the company's bottom line growth; they see it averaging a paltry 0.5% a year for the next five years.
This mining company pays a dividend yielding 5.0% on a low payout ratio of 24%. Its competitors, namely Peabody Energy (BTU) and BHP Billiton (BHP), pay dividend yields of 1.4% and 3.6%, respectively. Alpha Natural Resource (ANR) does not pay any dividend. The company's dividend yield and forward valuation are appealing. Among fund managers, billionaire Ken Fisher is bullish about the company's prospects.
Molex (MOLX) is a $4.1 billion company selling electronic interconnectors, switches and application tooling. The company has exposure to the telecom, computers, automotive, industrial, and military markets. It derives about 28% of its revenues from China. Molex has been in China since 1984 and operates a tooling company in the country. In 2009, Molex expanded China operations by acquiring a maker of radio frequency and microwave products. The company's exposure to China is susceptible to auto demand. The company is expected to grow its EPS by 6.9% a year over the next five years. Currently, the company appears to be somewhat undervalued compared to its average P/E over the past five years.
Molex pays a dividend yielding 3.80% on a payout ratio of 55%. The company's competitors, including Amphenol Corp. (APH) and TE Connectivity Ltd. (TEL), boast yields of 0.80% and 2.70%, respectively. The company's dividend growth over the past five years averaged 25.6%. Fund manager Joel Greenblatt acquired a minor stake in the company in the previous quarter.
Applied Materials (AMAT) is a $13.6 billion manufacturer of equipment used to make semiconductors, solar panels, and displays. The company's exposure to China has nearly doubled within two year, growing from 13% of total revenues in 2009 to 24% of sales in 2011. Customers in China and Taiwan account for 78% of display and 80% of solar segment revenues. The company's exposure to China is set to increase as it relocates its Switzerland-based solar gear operations to China in an attempt to capitalize on the rapidly expanding solar energy market in the nation. While semiconductor capital equipment spending is forecast to plummet this year compared to 2011, it will grow at a moderate rate of 5% per year on average through 2016. However, any slowdown in China could adversely affect this growth.
Applied Materials pays a dividend yielding 3.4% on a payout ratio of 36%. The company's rival ASML Holding (ASML) pays a dividend yielding 1.1%, while Lam Research Corporation (LRCX) does not pay any dividend. The company appears to be attractive on valuation. David Dreman and Joel Greenblatt are bullish about the company.
Analog Devices (ADI) is a $10.8 billion multinational semiconductor company. It receives about 20% of its revenues from China. In its latest quarter, although its earnings dropped by a third, the company beat analyst estimates on both revenues and EPS. However, analysts believe that growth is likely to be slow in the near term. They conclude that with the "current macro overhang, orders are not likely to be strong enough to drive meaningful earnings revisions."
The company's stock yields 3.3% on a payout of 52%. The company's peers, such as Texas Instruments (TXN), Marvell Technology Group (MRVL), and Microchip Technology (MCHP), yield 2.4%, 1.9%, and 4.5%, respectively. The company has favorable forward valuation. Renowned investors Ray Dalio and Joel Greenblatt bought new positions in the stock in the first quarter of 2012 (see billionaire Ray Dalio's stock picks).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.