China Mobile a potential international dividend aristocrat? $CHL $VOD

I got to know about China Mobile as a dividend stock while research some of the top international telecom dividend companies in the world. China Mobile was an asia representative and what caught my attention is that it mirrors that of Vodafone.

Singapore investors would be glad to know that you can easily trade or get invested into China ADRs such as China Mobile on the SGX via your brokerages such as POEMS, Kay Hian and Lim and Tan. You can get dividends from this ADRs as well, but from what I Know with-holding taxes on dividends still applies.

Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.

So to say that China Mobile has the potential to be a dividend aristocrat would be saying that

1. it has the capability of increasing free cashflow consistently
2. manage debt to asset ratio for the longterm
3. sustainable business model and business economics

Lets take a look if fundamentally China Mobile is able to satisfy that.

China Mobile Limited, an investment holding company, provides mobile telecommunications and related services primarily in the Mainland China.

The company offers various services, including local calls, domestic and international long distance calls, intra-provincial roaming, inter-provincial roaming, and international roaming services; and voice value-added services, including caller identity display, caller restrictions, call waiting, call forwarding, call holding, voice mail, and conference calls.

It also engages in data businesses, which include short message services, wireless application protocol, and multimedia messaging services, as well as color ring services that enable users to customize the answer ring tone from various selection of songs, melodies, sound effects, or voice recordings; and provides various data products, such as Java applications, IVR, and PIM. In addition, the company offers agricultural information services; telecommunications network planning, design, and consulting services; roaming clearance services; technology platform development and maintenance services; and mobile data solutions, and system integration and development services, as well as operates a network and business coordination center. As of December 31, 2009, it served approximately 522.283 million customers.

The company was formerly known as China Mobile (Hong Kong) Limited and changed its name to China Mobile Limited in May 2006. The company was founded in 1997 and is based in Central, Hong Kong. China Mobile Limited is a subsidiary of China Mobile Hong Kong (BVI) Limited.

China Mobile is one of the largest mobile telecommunications company in the world by virtue of having the world’s largest subscriber base with the potential to grow further.

For a telco, it is important to have size because

1. purchaser power – you demand a large amount of equipment such that you have bargaining power
2. supplier power – you are large enough to determine the future direction of the industry
3. price competitive – you are able to undercut your competitors and still be able to be profitable

China Mobile has this and its hard to see it go out of business. however that doesn’t mean it will not run into trouble as license auctions and capex are 2 major operational risk that an investor would need to watch closely when investing in China Mobile.

Free Cashflow and Dividend payouts

Figure above shows the capital expenditure, free cashflow and free cashflow minus dividend payout for the past 10 years.

Notice that all are consistently rising. There is not a single year where free cashflow have been negative.

The significance of using free cashflow is that it takes into account capex and depreciation and that is the cashflow that China Mobile can pay investors.

So a rising free cashflow minus dividend payout is really good because it means that after payout out dividend, there is still plenty of cash to

1. go into retained earnings
2. pay off debts
3. buy back shares

The last payout ratio was 41% of net income, which is very good. Although it has to be said that most dividend aristocrats have a payout ratio of less than 30%.

The available dividend payouts in RMB is as follows:

2003 – 10 bil

2004 – 8 bil

2005 – 18 bil

2006 – 26 bil

2007 – 34 bil

2008 – 44 bil

2009 – 48 bil

As a note, dividend have been increasing which is encouraging.

ROIC and ROE

Due to competitiveness in the industry, profit margin have been falling. We should expect it to continue to fall. This typically means that growth will slow down and in the past many dividend aristocrats get into this phase of growth and have a chance to stop increasing their dividend payouts.

ROE is a healthy 40%, while ROIC is much higher at 80% since we calculate that by taking out the cash.

Cash Holdings

China Mobile currently has 264 billion RMB as cash and equivalent. This amount is 35% of its assets and 18% of current market cap. In summary cash holdings is very healthy.

Debt Levels

Total Long Term + Short Term debt is 9.9 billion RMB. This is at a very healthy level

Debt to Asset Ratio is 1.3% which is negligible.

Debt Coverage, which is define by debt/operating cashflow is 0.05, which means that it takes almost less than 1 month to clear its debt.

Valuation

At current price of USD 52 for the ADR, PE is is almost 7 times. PTB is 2.78 times. Price to sales is 3.26 times.

EV/EBITDA is 5.57 times.

I tend to favor EV/EBITDA for strong cashflow companies but this and the PE does make it seem that this stock is cheap.

However PTS and PTB looks fair value.

Conclusion

I think China Mobile at USD 52 presents a good price for you to look at. Its not overly cheap but considering that it is one of the largest telco in the world and have the potential for rising dividends. This could be something worth investigating.

Disclosure: not vested at the time of writing

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