Calling Hong Kong Collect 

09/09/2009 12:12 pm EST

Focus: GLOBAL

Carla Pasternak

Editor, The Income Investor

Phone maker VTech combines a loud dividend with a track record of rapid growth, writes Carla Pasternak in High-Yield International.

Founded in 1976, consumer electronics maker VTech Holdings (Hong Kong: 303; OTC: VTKHY) has emerged as one of the world's largest suppliers of corded and cordless telephones and electronic learning products. Telephone products and electronic toys each account for around 40% of revenues, while general manufacturing services for a variety of customers accounts for the balance.

The company is headquartered in Hong Kong; its manufacturing plants are located in mainland China. With some 22,700 employees, VTech [is] in ten countries throughout North America, Europe, and Asia. It is the leading supplier of cordless phones in the US, where it sells both its own VTech brand and AT&T-branded telephone products to retail outlets such as Wal-Mart Stores (NYSE: WMT), Target (NYSE: TGT), Office Depot (NYSE :ODP), and Staples (Nasdaq: SPLS).

The company declares a dividend twice a year. The $5.30 [was paid out] over the past 12 months and gives the stock a yield of close to 7%. While this year's payout is about 16% below last year's, over the past five years the firm has grown its dividend by an average 40% annually.

The consumer electronics maker has ratcheted up earnings an average 23% annually over the past five years while growing its market share across the world. Last year, however, revenues declined by 7% and profits by 34% to 59 cents a share, mainly due to declining sales in its US market resulting from the economic slowdown.

Despite the weakness, the company continued to gain market share, maintaining the number-one position in the US cordless phone market. It also gained market share in Europe and Asia, and the balance sheet remained strong. Management expects consumer demand to remain weak for the balance of 2009 and is "cautiously optimistic" that profitability will improve in the year ahead.

One risk factor that looms on the horizon, however, is the license agreement with AT&T (NYSE: T) [giving] VTech the exclusive right to use the AT&T brand name on consumer telephone products in the US and Canada.

The contract expires on March 31, 2010, but the agreement can be renewed for two more five-year terms. The AT&T branded product lines contribute an estimated 10% to 20% of total revenue, and if the license is not renewed next year, revenues could suffer. That said, the company's diverse revenue stream from different product lines and growing footprint around the world should help offset the potential loss.

Investors have shrugged off the company's recent earnings decline and bid up the shares over 200% from their November 2008 lows. Together with the hefty dividends, the shares have returned an enviable 96% so far this year. For an investor willing to keep close tabs on VTech's performance and its contract negotiations with AT&T, this ADR can provide a great way to tap the fast-growing Hong Kong equity market.

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