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Leigh Baldwin & Co.

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Stock of the Week

China Mobile

January 28th 2020

China Mobile
NYSE Symbol: CHL
Industry: Chinese telecom
Price as of 1/27: $44.16

 

After a negative 2018, the major averages came roaring back in 2019 led by tech once again. The last several years have seen similar trends with tech as the top sector, energy as the worst performing sector, value stocks remaining undervalued and International markets lagging the US markets. Heading into 2020, value stocks have perked up in the last month along with the International markets. The US and China have agreed on what has been called the first phase of a trade deal suspending new tariffs and cutting the September tariffs in half. The Chinese stocks have all perked up. A featured stocks last fall, Alibaba is up over 40% in the last year. This week we will highlight the largest Chinese telecom company, China Mobile.

China Mobile is the wireless leader in China with 946 million mobile customers, 10 times those of Verizon Communications or AT&T, and almost three times the U.S. population. 5G technology should be a strong catalyst for China Mobile and the rest of the telecom sector going forward. China Mobile has been getting ready for 5G by spending heavily in the past few years on its wireless network and a massive buildout of fiber to provide high-speed data connections. Since 2014, China Mobile broadband customers have gone from virtually zero to 175 million and yet the stock has gone nowhere in the last decade.

Beijing's outsize influence has shied many investors away from the stock. The Chinese government owns 72% of the stock and seems more interested in making wireless services widely and cheaply available to the Chinese people than in generating returns for China Mobile shareholders, but the cash keeps piling up. China Mobile has $47 billion in net cash or $12 a share.

Barron's ran an article on China Mobile quoting a number of analysts predicting a better balance with China Mobile continuing to build great networks and provide high-quality services at low prices, while still boosting earnings, cash flow and their dividend.

One analyst suggests China Mobile could raise its payout without denting its big cash reserves. The analyst has urged the company to lift its earnings payout ratio toward 75% in the coming years from its current 50%, which could provide a big lift to the stock. Currently, China Mobile has a 4% dividend yield, after a 10% withholding tax.

Even without the dividend hike, China Mobile's stock looks compelling trading for 11 times projected 2019 earnings of $3.80 and just three times sales. Compared to Verizon and AT&T, China Mobile trades for three times projected 2019 Ebitda verse Verizon and AT&T which trade for eight times projected 2019 Ebitda. Some investors may continue to shy away from China Mobile, but if more money flows move to the International markets in the coming years, China Mobile should benefit, particularly with the roll out of 5G technology.