Profit From the Dictates of Chinese Bondholders

Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In an apocalyptic scenario for global finance espoused by some, Chinese bondholders dump massive amounts of US Treasury securities, plunging the world into economic chaos as interest rates spiral.  While that has clearly not transpired (yet), Chinese bondholders are dictating American economic policy through the simple act of not buying US Treasury securities in the massive quantitaties as before.  Since July 2011, the Chinese have lowered their holdings of US Treasury Securities from $1,314.9 billion to $1,149.6 billion.

The refusal to buy and resultant net selling by the Chinese has obviously resulted in the need Quantitative Easing 1, 2 and 3.  This has also forced quantitative easing measures in Europe and Japan, too.  After all, if the Chinese were still buying US Treasury securities and the sovereign debt of other nations, there would be no need for the Federal Reserve and other central banks around the world to have to buy domestic government bonds and implement other quantitative easing efforts that result in inflation.  There is no reason that investors should not profit from this transpiring.

The best way to gain from the fiscal irresponsibility of the United States Government and others is through dividend paying stocks that will profit from the growth of the Chinese economy.  Beijing is focused on developing the service sector of its economy.  The Chinese Government is terrified about the prospect of an "Arab Spring" uprising in its domain and determined to foment consumer spending by the middle class to galvanize the economy to appease its citizens.  For further development of its infrastructure, China recently announced a $156 billion stimulus package.  With more than $3 trillion in foreign reserves, China will not have to borrow like the United States or Europe to fund those government initiatives.

Companies that will benefit from the burgeoning consumer sector and greater infrastructure outlays include Yum! Brands (NYSE: YUM), Caterpillar (NYSE: CAT), Wal-Mart (NYSE: WMT), Coca-Cola (NYSE: KO) and Unilever (NYSE: UL).  Each of these firms has a strong presence in China that is expanding; along with a global franchise.  To enhance the total return, all of these stocks offer a strong dividend yield

Unilever is the second largest consumer company in world; and is looking to increase its business in China by up to 500%.  Based in London, Unilever sells such well-known consumer products as Dove soap and Vaseline around the world.  Harish Manwani, Asia chief for Unilever, stated that, "Our business has been growing steadily about 18 percent to 19 percent per annum.  Our commitment in China is to build a business four- or fivefold..."  From this business growth, Unilever can pay its shareholders a dividend of 3.18%.  The average dividend yield for a member of the Standard & Poor's 500 Index is around 2%.

The largest manufacturer of heavy equipment on the world, Caterpillar has a number of facilities in China.  When China announced its $156 billion stimulus package recently, the share price of Caterpillar surged, evincing its exposure to China.  The dividend yield for Caterpillar is 2.28%.  With a dividend payout ratio of only 20.24%, there is ample cash flow to raise the dividend for initiate share buyback programs to reward stockholders.

Like Unilever, Coca-Cola, McDonald's and Yum! Brands will also benefit from the growth of the consumer class in China.  Yum! Brands has a particularly strong presence in the People's Republic.  The Chinese units of Yum! Brands such as KFC and Pizza Hut restaurants are far more profitable than the American stores.  

Wal-Mart opened its first Supercenter and Sam's Club in Shenzhen, China in 1996.   In China, Wal-Mart "had owned 370 units in 140 cities in 21 provinces and four municipalities, and had created over 106, 500 job opportunities across China."  Wal-Mart has established partnerships with nearly 20,000 companies in China to produce items for its stores around the world.  For its facilities in China, over 95% of the merchandise in Wal-Mart stores in China is sourced locally.

Over the next three years, Coca-Cola is investing $3 billion into its operations in China.  Coca-Cola has more than 40 bottling plants in the People's Republic.  Last year, there was an 13% volume growth for Coca-Cola in China.  As the consumer class in China expands, more will be able to afford Coca-Cola as a daily aspect of life rather than an aspirational indulgence.

No matter what Chinese bondholders do, each of these companies will offer a healthy dividend yield to its shareholders as the chart below shows.

 

WMT Dividend Yield data by YCharts

That Federal Reserve Chairman Ben Bernanke has moved for open-ended quantitative easing by the central bank, termed "QE Forever" by one commentator, it appears as if there is little optimism that the Chinese (or anyone) will be adding to their holdings of US Treasury securities anytime soon.  As a result, investors should look towards multi-national companies that will profit from economic growth in China.  While economic growth in China is slowing down, it is still registering over 7%.

Caterpillar, Yum! Brands, Unilever, Coca-Cola and Wal-Mart are all committed to China.  Each also has a strong global brand name that will allow for gains from the growing emerging market consumer class.  Even during The Great Recession, the emerging market middle class continued to expand.  By 2025, according to a recent  McKinsey & Co. report, consumer spending in emerging market nations will reach $16 trillion, half the global total.  Much of that will emanate in China to the benefit of Unilever, Coca-Cola, Wal-Mart, Caterpillar and Yum! Brands.

 Dig Deeper

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jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company. Motley Fool newsletter services recommend The Coca-Cola Company and Unilever. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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