Invest in This Telecomm Giant for Yield Without the Market Maturity
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Usually when thinking of telecommunications companies, AT&T (NYSE: T) and Verizon (NYSE: VZ) are the first firms to come to mind. Sure, there's also MetroPCS (NYSE: TMUS) and Sprint (NYSE: S), but AT&T and Verizon are the dominant duopoly in the business. When I think of telecoms, I also think yield. In a yield starved environment, AT&T and Verizon, offering yields of around 5.1% and 4.6% respectively, can provide investors with a source of generating income. Metro and Sprint- not so much. Neither of the aforementioned offers a dividend payout. Sprint looks more like a spec play at this point, and MetroPCS without yield isn't offering much in the income-generation category. AT&T and Verizon are also starting to look pricey, with both trading near their 52-week highs. Investors, however, also have another option to fill the telecom void in their portfolio if they look abroad for alternatives.
Not too hot, not too cold...
China Mobile (NYSE: CHL) may be the telecommunications firm to save the day. The firm may not be too hot as far as yield goes (its dividend yield of around 3.4% is inferior to the yields of the U.S. duopoly of AT&T and Verizon), but it isn't as cold as Sprint or PCS either- and seems to be in far better shape financially than all four mentioned American firms when comparing debt to equity ratios. Not to mention that the Chinese carrier is also the world's largest carrier by subscribers. China Mobile is also attractively valued, being priced at around only 11 times earnings- a discount to its large U.S. counterparts AT&T and Verizon (the smaller Metro PCS currently trades at a P/E of around 8, with a forward P/E of around 13. Sprint is currently plagued by negative earnings per share, and thus has no P/E ratio). We are looking at a company with over $200 billion in market cap here, so they are definitely a force to be reckoned with, and also have the growing Chinese consumer base on their side.
But wait a minute...they don't have the iPhone?
You would think not having the iphone would be an issue for consumers, but apparently not. China Mobile recently reported its best-ever monthly 3G uptake numbers, "adding 5.5 million net 3G subscribers in December as against an average of about 3 million in the previous months," according to Forbes. This comes at a time when the iphone 5 was released on two competing carriers who saw only around 3 million new subscribers each. Apple needs China and emerging markets for future growth, and is still doing well on other carriers such as China Unicom and China Telecom, but ceding smartphone sales to Nokia and Android to the world's largest carrier isn't something to be thrilled about. While Apple may eventually work out a deal with the company, China Mobile seems to hold the upper hand.
Maturity... an emerging concern in the U.S. but not China
Buying shares of AT&T and Verizon will give you yield, but know that these companies are dealing in the United States where smartphone sales grew year-over-year by only 9% in Q2, according to Forbes. What about China? China Mobile is just now looking to expand into 4G. 3G penetration in China is only at about 20%, and may be poised to pass the States as the largest market for smartphones soon. China Mobile dominates in its domestic market, and is positioning itself to dominate in the future by investing in 4G ahead of competitors, as well. Saturation of the U.S. market may be far away, but maturity will most likely be approaching much faster in the States than in China.
The bottom line
China Mobile is a telecommunications mega-cap that is attractively valued at current levels. It offers a relatively good dividend, and what it lacks in yield it compensates with its potential for growth. As the Chinese market for smartphones and other mobile devices grows and expands, China Mobile will be at the forefront. Investing in the company also gives investors a bonus- relatively safe emerging market exposure. Unlike American telecoms such as AT&T and Verizon, the company doesn't need to rely on the iPhone to attract new subscribers, either, and can avoid the heavy Apple subsidies. China Mobile is an investment offering both growth and yield- a rare blend for most mega-cap companies that isn't seen everyday, and makes a good alternative (or even complimentary) investment to the more mature U.S. carriers.
All financial data obtained by Yahoo Finance
Jharry1 owns shares of AT&T; and Nokia. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!