China is the true growth story of the decade. According to the World Bank, the Chinese economy is the fourth largest in the world with a GDP one third that of the United States. China also has the world’s largest population, at 1.337 billion, or 19.61% of the world’s people. The Chinese economy grew 10% in 2010, which was on top of a 9% increase in 2009, 11.9% in 2008 and 10.7% in 2007.
One of the biggest benefactors of such sterling growth is the telecommunications industry, and in particular China Mobile (CHL). Since May 2003 the stock price of the company is up about 300%. The company is one of the largest telecoms companies in the world, and has the most subscribers. As of April 2010, China Mobile (CHL) had 544 million customers. That’s about 75% more than the population of the entire United States!
China Mobile (CHL) is a mobile service provider in China. The company’s principal activity is providing mobile telecommunications and related services in 31 provinces, autonomous regions and directly-administered municipalities in Mainland China and Hong Kong. The products and services of the company include voice business, voice value-added services and data businesses. It has about 65% of the market in China.
The company is listed on the New York Stock Exchange (CHL) and pays out a quarterly dividend. At the current price of $46.50 the stock yields 4.02% in dividends. The next dividend of $0.94 is due to be paid in June 2010. The dividend has grown at an astounding 34% per year for the past five years.
China Mobile (CHL) really possesses all the characteristics one looks for in a high, growing and stable dividend payer. Net revenue is growing, net income is growing, and dividends are therefore growing. The company churns out cash ($30 billion in 2009) and has a fair bit of it on the balance sheet - $38 billion at the end of last year. That’s enough to buy the whole of Ford Motor Company (F). Debt comes in at only $1.4 billion.
China Mobile (CHL) also has a very conservative dividend payout policy, at 22% of earnings, leaving much room to grow the distribution. The company currently produces a return on equity of 22% which is excellent given its size, and is one of the reasons why no increase in the payout ratio has yet arrived. However, over the medium to long-term, this ratio will rise resulting in an increased percentage of earnings paid out as dividends and therefore increased dividends. Vodafone’s (VOD) payout ratio is 77% while AT&T’s (T) is about 78%.
With a growing population, a stable business model and huge upside to dividends, what are the risks? The chief risk really is the fact that the company is still majority owned by the Chinese government. Recently we’ve seen this in a deal where China Mobile (CHL) recapitalized Shanghai Pudong Development Bank to the tune of $6 billion, under the auspices of building a “mobile banking” platform. What was not mentioned is that Shanghai Pudong Development Bank is struggling with a bad loan book and way under-provisioned loans it made during the credit boom recently.
Regardless of this risk, China Mobile (CHL) is a stable business with a growing market and incredible cash flows. The dividend has much room to move up and there’s plenty potential for the dividend-seeking investor to sleep well with this one.
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