Four Chinese Dividend Picks From The Matthews Funds
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The Matthews family of Funds specializes on investing in Asia. A new report out from portfolio manager Yu Zhang stresses the benefits of a dividend focus in China and the changes in the market that make it easier now than ever before to be a dividend investor in that country. Four stocks in Matthews China Dividend Fund's concentrated portfolio are easy for U.S. investors to get their hands on.
Dividends are Important
While many dividend-focused investors are well versed in the importance of dividends in the U.S. market's performance, most probably don't even think about dividends when it comes to China. Since the Chinese story is all about growth, that's not surprising. However, Zhang recently shared some very interesting statistics in a fund report.
For starters, “When the long-term historical performance of global equity markets is considered, investors can see that the contribution of dividends to total return is significant. In this regard, China has been no exception. Between 1999 and 2012, 46% of the total return of the MSCI China Index was derived from dividends received and reinvested.” That is about in line with the long-term numbers for the U.S. market and clearly shows the benefit of dividends.
The reasons to like dividends in China, however, don't stop there. “From 2010 to 2012, the MSCI China Index produced a total return of approximately 6%. If contributions from dividends are excluded, the index would have returned -3%, meaning all positive returns were derived from dividends.” Clearly, dividends in China also provide the same kind of downside protection as they do in the United States.
Are There Enough Dividend Payers?
While there are material risks in looking at Chinese companies at all, the above statistics suggest that there might be a good reason to focus on dividend paying companies. And, according to Zhang, there's more options now than ever. The manager notes that “...the pool of dividend-paying companies increased more than three- fold, from 238 companies in 1998 to approximately 842 companies by the end of 2011.” That's a pretty sizable number and more than enough to create a diversified portfolio.
Adding more luster to the concept, Zhang goes on to say, “...what may surprise many investors is that Chinese companies have offered both higher yields and higher dividend growth than U.S. firms.” While investing in China can be difficult, there are four companies from Matthews China Dividend Fund's focused portfolio (it held fewer than 40 stocks to start 2013) that trade on U.S. exchanges. Investors might want to consider these picks:
Taiwan Semiconductor (NYSE: TSM)
Taiwan Semiconductor was founded in 1987. It claims to be the worlds first dedicated semiconductor foundry. It is definitely the world's largest. The company focuses its efforts on making chips that other companies design. It has 14 facilities that it either owns or has agreements with throughout the world, including one each in China and the United States.
The company's results have been relatively weak of late, in line with the broader chip industry. If, however, the chip market is making a turn, which seems to be happening in certain chip segments, Taiwan Semiconductor would definitely be a beneficiary. Like all chip makers, Taiwan Semiconductor's factories cost a great deal to operate, which leaves earnings vulnerable to sales declines, but increases the upside potential when demand is high.
An interesting note about Taiwan Semiconductor's business is that management is branching out into the currently hot fields of lighting and solar energy. While there are definitely synergies between chip making and these two industries, there is always a risk in moving into new areas. This is particularly true for a company that has benefited for so long from a singular focus.
China Mobile Ltd. (NYSE: CHL)
China Mobile is a provider of cellular phone service in China and Hong Kong. It is among the largest cell providers in the world, giving it a large base of users and an annuity like revenue stream. The big opportunity right now is the shift from voice to data, which brings with it higher fees and, usually, increased usage. No doubt, China Mobile will be a long-term beneficiary of this shift, as well as the increasing number of citizens entering the middle class as the country industrializes.
It is worth noting that the company is basically state owned. This gives the Chinese government a large voice in the company's decisions. Many attribute China Mobile's decision to use technology that isn't an industry standard in the world to government interference. That choice has been a competitive disadvantage and has likely helped to hinder its customers' shift to digital usage.
That level of government involvement might scare away conservative investors. However, it is hard to argue with the scale of China Mobile's customer base and the potential that holds for increased data usage over time. A massive cash hoard further sweetens the pot.
CNOOC (NYSE: CEO)
CNOOC is China’s largest producer of offshore crude oil and natural gas and one of the largest independent oil and gas exploration and production companies in the world. The company has been in the news of late because of the U.S. government's approval of its purchase of Nexen (NYSE: NXY), a Canadian energy company. This is a big deal because it gives China a notable position in the Canadian Oil Sands region, which is likely to be an increasingly important oil region over the long term.
CNOOC's main areas of operation include Bohai Bay, the Western South China Sea, the Eastern South China Sea, and the East China Sea. CNOOC essentially has an exclusive right to develop these offshore assets. The company also has operations in Africa, North America, South America, and Oceania. Once the Nexen deal is completed, it will be able to add the UK North Sea, offshore West Africa, the Gulf of Mexico, and Western Canada to the list, though some of these overlap with its current properties.
Like many other key Chinese companies, CNOOC is effectively controlled by the Chinese government. In fact, part of its stated purpose is to ensure energy reserves for its home market. In this situation, however, that should be less distressing than it might at first seem. Energy is going to be an important issue for China and securing foreign energy sources will be vital. This means that CNOOC is likely to keep growing and have the cash-rich government's support.
China Petroleum & Chemical Corp. (NYSE: SNP)
More commonly known as Sinopec, China Petroleum & Chemical is another oil company that hails from China. It was “established” in mid 1998. Like CNOOC, China Petroleum is a major oil exploration company. However, it is also one of the largest chemicals and refining companies in the world, too, with a big distribution network (gas stations) within China.
Interestingly, like CNOOC, China Petroleum has also ventured into Canada to acquire oil and natural gas reserves. Notably, the company's 2011 purchase of Daylight Energy expanded its foothold in our northern neighbor. It has also just inked a joint venture deal with Chesapeake Energy. As with CNOOC, the company's goal is to serve its home market, with a motivated government backing its efforts.
That said, the company has been hindered by price controls in some of its business segments. This is, to some extent, the price the company has to pay for being allowed to operate on such a vast scale within China. Overall, however, the company is in line to grow along with the growth in demand in its home nation.
China isn't Risk Free
There are a lot of risks when it comes to investing in China. Focusing on dividend paying companies doesn't make those issues go away, so conservative investors might want to take a pass on even these companies, perhaps using a fund, like Matthews China Dividend Fund, as an alternative. That would put a professional in charge of monitoring what is going on at the country and company levels.
More aggressive, do-it-yourself types, however, should take a look at these four dividend payers, noting that Matthews often favors dividend growth over current yield.
Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. 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!