China Mobile flirts with record dividend yield

The world's leading telecom operator is delivering a growth rate that would be the envy of its Western peers.

With revenue of $150bn, which has grown by half over the last ten years, China Mobile boasts another distinctive feature: it has no net debt, making it the best-capitalized telecom operator in the world. This has not prevented it from posting a return on equity above that of European operators.

However, as in Europe, the Central Party - which controls China Mobile via a state-owned enterprise attached to SASAC, the State Council body overseeing major strategic public enterprises - prioritizes the most affordable network access possible.

In this regard, China Mobile's margins and profitability have remained structurally under pressure throughout the last cycle. This is evidenced by operating profit growing by only 6% over the last decade - in reality a decline when adjusted for inflation - while revenue increased at a much more sustained pace.

Same ends, different means: in Europe, regulators encouraged market fragmentation to stimulate competition and lower prices; in China, the world's largest market, the sector is perfectly consolidated, although the political objective remains the same.

As with its Western peers, the trend at China Mobile is towards a reduction in capex after a decade of frantic network upgrades. Note that the Chinese operator maintains the same capital intensity as its Western counterparts: its presence at the heart of major supply chains does not seem to have offered it any notable strategic advantages.

Dividend distribution naturally remains at the center of its priorities: it has tripled its dividend per share in twenty years and has doubled it in ten, a performance that no Western peer has been able to match. However, many analysts question the sustainability of this trend in the face of China's demographic shifts and a penetration rate that has now hit a ceiling.

This, coupled with rising interest rates in 2022 and a policy of tightening control over both large private firms and state-owned enterprises by the Party, has pushed the valuation to a dividend yield near historical highs.

In this respect, it is higher than that of the two major US operators, both of which face serious debt issues; and even more significantly higher than those of the major European operators, which remain trapped in a ruthlessly competitive environment.