Go West for Dividends… Way West

China has slowed down, yeah right. If you call 7.5% economic growth and an urbanization of more than 300 million in the next six years slow then you may be hard-pressed to find a market in which to invest.

Ok, yes 7.5% is less than the heady days of double-digit but China still adds approximately $617 billion to its economy every year and that translates to a lot of opportunity. In the past, growth investors have had to sacrifice dividend payouts but Chinese stocks may be able to provide your portfolio with both higher prices and a strong cash return.

Besides the strong economic growth, dollar-based investors also get a nice currency boost. Though the Chinese government only allows the Yuan to float within a narrow range during any given day, there is really no stopping the long-term appreciation of the currency. Since 2000, the Yuan has appreciated 28% against the dollar with fairly regular growth. This means that the stocks you own of Chinese assets are worth more dollars and the dividends paid will increase in dollar-value as well.

The Shanghai Stock Exchange is encouraging companies to pay at least 30% of profits out to shareholders in an effort to attract more investors to the market. China announced last year that it would cut the dividend tax rate in half to 5% for investors holding shares more than a year. This should put a premium on dividend payers and could play out with higher interest as the market matures.

Nam Tai Electronics (NTE) is a smaller company with a market cap of just $316 million. The company supplies Apple phones with LCD modules. The shares are well off their high from earlier in the year on a couple of difficult earnings releases. Sales could surprise on the upside in the coming quarters as the iPhone builds momentum.

The company has a pristine balance sheet with almost $5 per share in cash and no debt. Shares trade 6% under book value and I wonder if the high cash balance and low price might make it a buyout target at some point. At any rate, the shares pay a 7.9% dividend supported by free cash flow in a growing industry.

China Mobile Limited (CHL) has the world’s largest subscriber base among mobile carriers at 755 million subscribers. The company dominates the local market with a 70% share and faster growth in 4G service against peers. Apple (AAPL) investors have been talking for years about the possibility of getting that juicy China Mobile contract. Why wait when you can invest now in China Mobile, and still eventually benefit on an Apple contract.

Of course, it is more difficult to get the kind of growth in a $209 billion company as you might get in a small cap. Shares are trading just 15% under MorningStar’s estimate of a $60 fair value but the 3.8% dividend yield will pay you to wait for price appreciation. The company has over $72 billion in cash, more than a third its market cap, and just $4.5 billion in debt.

These are obviously not the only opportunities available for Chinese dividends but I have omitted a few well-known names on purpose. I am generally leery of state-owned emerging market companies like PetroChina (PTR) because you never know when shareholders will be asked to take a backseat to the social good. I would avoid the banks as well because of debt concerns over the last few years. You probably don’t need more than a few good China names to add to a diversified international dividend portfolio.

1 Comment

  1. W2R, some nice insights there. While I’m generally leery of companies with less than transparent accounting and reporting and have some general concerns about Chinese companies, China Mobile is one I’m intrigued by. I’ll have to do a little more research on this.

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