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China Mobile Limited (SEHK: 941) is China’s largest telecoms operator with around 950 million mobile customers. Given its scale and state backing, it has a wide competitive moat. And considering the recurring nature of telecommunications contracts, China Mobile’s future cash flows are fairly predictable.
Although China Mobile has many advantages, the company only trades for a forward valuation of 10.7. One reason for the relatively low valuation is that China Mobile is a state-owned enterprise (SOE). These SOEs can sometimes put the state’s interests first rather than shareholders’.
With a forward dividend yield of around 4.8% at current prices, China Mobile is a popular dividend stock among those looking for income. And given that it’s the new year, I thought it would be worthing asking – can China Mobile increase its dividend in 2020?
China Mobile’s dividend history
China Mobile has a relatively low payout ratio. Over the past five years, China Mobile has paid out less than half of its earnings in the form of normal dividends. In 2017, the company did pay a special dividend per share (DPS) of HK$3.2o (US$0.41).
China Mobile earnings and dividend per share (HK$)
|Diluted Normal EPS||6.73||6.53||6.20||6.43||6.81|
|Dividend per share||2.92||2.72||2.73||3.20||3.21|
For the first half of 2019, China Mobile continued the trend, paying out only 49% of its earnings. The payout ratio gives management room for increases if they decide that’s what’s best.
Factors working against a dividend increase
Although the telco has a relatively low payout ratio, several factors work against a dividend increase.
First, China Mobile’s financial performance hasn’t been stellar as of late. For its interim 2019 report, China Mobile’s earnings actually fell 14.6% year-on-year and as a result, China Mobile’s interim 2019 dividend was lower than its interim 2018 dividend.
China Mobile is also currently spending billions building out its 5G network. If there are unforeseen delays or cost overruns, it could potentially spend even more capital expenditures than it budgeted for.
To prepare for any large budget overruns, management might not increase the dividend much as a precautionary measure.
Another factor working against a dividend increase is that China’s economy isn’t very strong at the moment. If China’s economic growth remains soft, many China Mobile customers will opt for cheaper plans due to the economic uncertainty.
The Wuhan coronavirus obviously does not help. Not only does the coronavirus slow China’s economic growth, but also the outbreak hurts phone sales due to many stores remaining closed amid the containment efforts.
Any weakness in phone sales could lead to less higher-margin 5G subscribers than anticipated for 2020.
Stock market reaction
If the market thought that China Mobile would increase its dividend significantly, the telco’s stock price would arguably be a little higher than where it is right now.
Instead of rallying over the past year due to many dividend investors buying for a potentially higher yield, however, China Mobile’s stock has declined from around HK$82 a year ago to around HK$64 today.
The relative weakness indicates that many in the stock market don’t anticipate a big increase in China Mobile’s dividend.
It is not certain whether the telco will increase its dividend or not. Given its relatively low payout ratio, China Mobile could increase the dividend if it so desired.
But there’s also the slowing of China’s GDP growth and China Mobile’s big investments in 5G, which means a substantial increase in China Mobile’s dividend doesn’t look likely.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Jay Yao doesn’t own shares in any companies mentioned.