2 International Telecoms With Growth And Dividends

Includes: CHL, ORAN
by: Catalyst Investments

With the rapid changes, high competition, and overall uncertainty of the U.S. telecom industry, many investors have preferred to stay away from the industry altogether, unsure of how to play the market. However, for those willing to look beyond the U.S., there are many telecom opportunities abroad. Internationally, many markets are still looking to expand to users who do not own cell phones, or break into new 3G technologies, providing good growth potential and great investment opportunities. Two companies, France Telecom (FTE) and China Mobile (CHL), have become leaders in their respective markets, and are worth looking at for their growth and dividend potential.

China Mobile

China Mobile is the world's largest mobile provider, with over 650 million customers, mostly in China. As a government owned company, CHL has enjoyed protectionist benefits, and will continue to do so, making it an attractive company from the start. Against two of its biggest competitors, China Unicom (CHU) and China Telecom (CHA), China Mobile's $198m net profit is 30x and 7.6x times the net profit of each, respectively, proving that CHL dominates the market.

Over the past few years, CHL has spent billions investing in its homegrown 3G technology, called TD-SCDMA, which it is hoping will give it an additional advantage when China begins to move to 3G on a larger scale. Since 2009, CHL's stock has been rising consistently, and it is paying a 3.5+% dividend, providing an extra incentive to investors.

However, as China continues to struggle economically and competition increases, some have become wary of CHL's growth outlook. Per 2011 financial statements, the company's net cash inflow from operating activities increased by only 2-3%, while total liabilities increased about 10%. However, over the last 3 years, its net profit growth has been increasing; in 2009, 2010, and 2011 its annual net profit growth rate has been 2.3%, 3.9%, and 5.2% respectively. While these growth rates do lag those of smaller competitors, such as China Unicom and China Telecom, it is import to remember that a small increase in dollar amount for these other companies can create a high growth rate, and these companies are still far behind China Mobile in dollar terms.

One place that CHL does need to improve on, however, is its 3G network. While the company has been successful in attracting new customers in rural areas who have never had cell services before, other companies are moving quickly to grab 3G market share. In recently reported numbers, only about 1.9 million subscribers opted to join the company's 3G network in July. In May, China Unicom had 54.5 million 3G subscribers, up 2.73 million users and 5.3 percent month over month from April, and China Telecom added 2.6 million 3G subscribers in May, growing 5.7 percent month over month. In an effort to combat these statistics and attract more 3G customers, CHL has been heavily investing in its TD-SCDMA technology, and its success may have a large impact on China Mobile's future outlook.

Overall, as basic mobile technology and phones continue to reach the rural regions of China, CHL will be able to lean on its proven and successful 2G network, while continuing to perfect, improve, and invest in its 3G network. Its government ownership will provide plenty of benefits, and the government will likely do everything it can to make sure its telecom business maintains the number one spot.

Even with slowing growth, CHL's high margins will be able to sustain a good stock price and growth. And despite the increased competition, there is still plenty of business to go around in China. As a bonus, CHL's dividend provides a good cushion for investors, and with some people questioning its future potential, it may be a good buy for everyone else.

France Telecom

France Telecom, a European mobile operator, Internet access provider, and network services company has a customer base of over 200 million under its many subsidiaries throughout the region. A different story from CHL, FTE has been losing customers and profits in the past, but is beginning to see things turn around, thanks to its expansion efforts, business diversification, and investments. For investors, its 12+% dividend is making sure the stock remains attractive, and coming off a 52-week low, the company looks as attractive as ever.

In its latest earnings report, the French company added 654,000 broadband subscribers, including 378,000 in France, 194,000 in other European countries (including Spain, Poland and Slovakia) and 82,000 in Africa and the Middle East (including Egypt and Jordan).

Additionally, the company's investment in fiber connections to residential buildings in France is paying off, with new connections increasing from 73,000 in Q2 2011 to 123,000 connections in Q2 2012. And with such encouraging numbers, the telecom looks set to achieve its plans laid in 2010 of bringing FTTH-based services to 60 per cent of France's households by 2020.

The French company also plans to invest another $2.5bn by 2015 in the network. Apart from investment, the company is also forming alliances with other players like Free (Iliad), SFR, and most recently Bouygues, to gain access to a larger fiber network. Apart from its fiber initiatives, FTE is planning to expand ADSL coverage to more than 99 per cent of residential homes in 2013.

Region wise, France Telecom has made deep inroads in Poland, thanks to its triple-play packages, which have helped it to gain 151,000 customers in Q2 2012 compared with 29,000 at the same time last year. In Spain, where half of the fixed broadband market is dominated by Telefonica, France Telecom has been able to reap its biggest broadband gains with the help of its aggressive tactics of offering cheap services against Telefonica's pricey packages; its ADSL packages there are almost half the price of Telefonica or Jazztel offerings.

Throughout the region, FTE's capital expenditures have been increasing, showing France Telecom's commitment to expand and update its network and equipment. Still, its ROI is 13.28, compared to the industry average of just 7.05.

With its positive growth prospects and strong presence in the domestic market, paired with continued expansion in the international and emerging markets, FTE appears well positioned for future growth. The company has a good balance sheet to back its future endeavors and a great dividend; the only worries are macro factors across Europe, including overall economic conditions, labor concerns, and regulatory issues in European markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was prepared for Catalyst Investments by one of our analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

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