Dialing for Dividends in Asia

02/02/2010 12:00 pm EST


Yiannis Mostrous

Editor, The Capitalist Times

Yiannis G. Mostrous, editor of The Silk Road Investor and associate editor of Personal Finance, finds high-yielding telecom stocks in two of greater China’s best markets.

In the first week of January, the People’s Bank of China (PBoC) sold three-month bills at the highest interest rate in almost five months. Investors around the world concluded the move was China’s first step towards a tighter monetary policy and signaled an imminent rate hike.

We disagree. The earliest China will start tightening is the second or third quarter of 2010, though authorities may tighten loan guidelines and boost reserve requirements to slow lending. China’s leadership has made it clear that it will withdraw liquidity gradually; destroying market confidence isn’t an option.

The Chinese economy delivered stellar results in 2009, a huge contribution to global growth. Prospects for major developed economies remain shrouded in uncertainty; it will be tough for Chinese policymakers to aggressively rein in domestic animal spirits.

Granted, a prolonged period of loose monetary policy could eventually inflate an asset bubble in Asia, but this is a longer-term concern. In a command economy like China’s, where the government controls all the levers of fiscal and monetary policy, such a threat is less likely to materialize.

Emerging markets have outperformed the MSCI World Index over the past four years. Stretching the time line to a decade makes the outperformance more pronounced. Asia has outperformed the Standard & Poor’s 500 by 126% in the last decade, and there’s no reason why this can’t continue.

If we’re to put a number on Asia’s performance for 2010, a 20% gain in the MSCI Asia ex-Japan Index wouldn’t be a far-fetched prediction.

China Mobile (NYSE: CHL) has a subscriber base of more than 300 million and generates 80% of the Chinese telecom industry’s mobile-related revenue. China Mobile declined 5% in 2009 as investors rushed to buy cyclical stocks. Because telecom competition has intensified, it’s been difficult, even for the best companies, to grow revenues substantially, and this has hurt the company’s short-term performance. This also means that telecom stocks trade at attractive valuations for long-term investors.

In addition, telecom companies in Asia still offer solid growth opportunities coupled with sustainable dividends backed by solid revenue streams. The stock offers both growth and income potential, which makes it a compelling long-term investment. Sporting a 3.5% yield, China Mobile is a Buy up to $60. (It closed above $48 Monday—Editor.)

Chunghwa Telecom (NYSE: CHT), the fixed-line incumbent in Taiwan, provides local, domestic long-distance and international long-distance services. The company is also the dominant player in the mobile and broadband markets. [Taiwan’s] Ministry of Transportation and Communications, with a 36% stake, is the largest shareholder.

The company is the quintessential income telecom to own in Asia, offering a 5.7% dividend yield, and has a stockholder-friendly management team. The company also offers growth as it expands its broadband operations in China. Buy Chunghwa Telecom up to $20. (The ADSs closed above $18 Monday—Editor.)

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