China Mobile might seem an odd target for activist investors seeking higher dividends. The company's Hong Kong-traded stock yields more than 3 percent -- not bad, you might think, for the dominant operator in the world's largest mobile Internet market, especially at a time of negative or near-zero interest rates across much of the world.
Yet China Mobile has long been a bugbear of disgruntled investors who say the company hoards too much cash. The latest to join the fray is hedge fund Indus Capital, which is trying to persuade the company to return more funds to shareholders, according to the Financial Times.
There's a case to be made. China Mobile had more than $65 billion of cash and marketable securities on its balance sheet as of the end of last year. That figure has almost doubled since 2008, while the annual dividend is only modestly higher. The company has barely $1 billion of long-term liabilities, with a debt-to-equity ratio of 0.6 percent as of December, according to data compiled by Bloomberg.
Listed in 1997, before the first wave of Internet euphoria and long before the era of smartphones, China Mobile (initially known as China Telecom ) represented the cutting edge of the country's technological development. In many ways, the carrier continues to behave like one of its fast-growth, high-technology brethren, though those days are long gone.
Between 1997 and 2001, China Mobile's annual revenue growth averaged more than 57 percent. In the most recent five-year period, it was less than 7 percent. A saturated industry is to blame. China's mobile-phone penetration rate is 95 percent, according to Bloomberg Intelligence analyst Michelle Ma. China Mobile has more than 800 million subscribers and a market share of 65 percent.
Corporate finance theory dictates that companies accumulating excess cash and without available investment projects that promise to earn more than their cost of capital should return the money to shareholders. This creates a more efficient capital structure and a higher return on equity. Not to do so invites temptation to fritter the money away, on pointless and value-destroying diversification, for example -- "diworsification," as fund manager Peter Lynch called it.
That was the charge leveled at China Mobile when it agreed in 2010 to pay $5.8 billion for 20 percent of Shanghai Pudong Development Bank. The purchase was purportedly aimed at expanding the carrier's electronic-payment business. Six years on, the strategic alliance with Pudong Bank has failed to make much of an impression. Internet giants Alibaba (through its Alipay affiliate) and Tencent dominate the mobile payments business.
Shortly after taking heat from investors for an arguably unrelated acquisition, China Mobile said it was looking for deals in emerging markets to expand its overseas operations. Yet purchases have mostly been small, and the cash pile has continued to grow. Its last big investment overseas was an $880 million minority stake in Thai telecom group True Corp., backed by a billionaire known for his China ties. Others include the 2007 purchase of Pakistani mobile-phone operator Paktel for under $300 million.
Alibaba and Tencent also have plenty of cash ($22 billion and $14 billion respectively), though both have been on an M&A spree , buying everything from food delivery websites to video-game developers over the past couple of years.
China Mobile more closely resembles two U.S. technology giants that came under investor pressure to return cash to shareholders after settling into a more mature, lower-growth phase: Apple and Microsoft. Apple paid its first dividend in 17 years in 2012. Microsoft started payouts in 2003 and has increased them steadily since.
What chance do Indus Capital, an investment firm founded in 2000 by former Soros Fund Management partners, and its ilk have of persuading China Mobile to follow the same road? A key difference is that the carrier is controlled by the government, with its state-owned parent holding a 73 percent stake, so is subject to national development priorities set in Beijing. Keeping hedge funds happy isn't likely to figure high on the list.
As a company with an international profile (its shares also trade in New York), China Mobile may be more responsive to minority shareholders than some. As a financially prudent cash cow, it's also far from the typical debt-bloated Chinese state-owned enterprise.
In truth, though, there are probably better targets out there. China Mobile pays out more than 40 percent of its annual profit, a figure that's slipped only modestly in recent years. That ratio would put the company in the top six of the Hang Seng China Enterprises Index of mainland companies traded in Hong Kong .
The nation's four biggest banks, for example, pay an average of about 30 percent (their dividend yields are much higher than China Mobile's, because of the shares' depressed valuations).
What about agitating for higher payouts from ICBC and its peers? Somehow, that doesn't seem likely.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Based on China Mobile's HK$2.72 payout in the past 12 months and the stock's closing price of HK$86.75 on Wednesday.
That name has since been adopted by another company, which is also listed in Hong Kong.
China Mobile isn't a member of the index because it listed through a Hong Kong-incorporated unit.
To contact the author of this story:
Nisha Gopalan in Hong Kong at firstname.lastname@example.org
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