China Mobile Limited (SEHK:941) is China's largest telecoms operator with 925 million customers (as at the end of 2018). Meanwhile, HKT Trust and HKT Limited (SEHK:6823), or HKT Trust, dominates Hong Kong's telecommunications market and is the city's leading operator in broadband, fixed-line, and mobile communication services.
Both companies have their individual strengths and weaknesses. Yet I'll be looking at a key question on a lot of investors' minds who buy into telecoms firms; which one is the better dividend play?
Dividend yield and payout ratio
For 2018, HKT paid a dividend per share (DPS) of around HK$0.66, for a dividend yield of around 5.1% at its current share price. For the same year, China Mobile paid HK$3.217 per share, which is roughly the same dividend yield of 5.1%.
While they currently pay around the same dividend yield, China Mobile's payout ratio is superior to HKT Trust's. For 2018, China Mobile paid less than half of its earnings in dividends, with a payout ratio of just 49%. HKT Trust's payout ratio, meanwhile was slightly over 103%.
Given the high payout ratio, HKT Trust will have to take on new debt or cut its dividend if the company doesn't grow in the medium term. This means the likelihood of its dividend being sustainable is in doubt.
Fortunately for HKT Trust shareholders, the company's growth has more than covered the payout ratio imbalance in the past. For 2018, total revenue rose 6% year-on-year to HK$35.18 billion and adjusted funds flow for the year rose 5% to HK$5.17 billion.
Winner: China Mobile
Dividend growth history
Due to its earnings growth, HKT Trust's dividend growth has been impressive. In terms of dividend history, its DPS has increased every year for the last five years. As a result of the increases, HKT's dividend has increased 50% over that time period, from a DPS of HK$0.44 in 2014 to a DPS of HK$0.66 in 2018.
Meanwhile, China Mobile's dividend has been a little less dependable as its dividend payment fell slightly in 2015. Although China Mobile paid a surprise HK$3.20 per share special dividend in 2017, the stock's dividend growth has been lacking as China Mobile's dividend has only increased around 10% from 2014 to 2018, from a DPS of HK$2.92 in 2014 to a DPS of HK$3.21 in 2018.
Winner: HKT Trust
In terms of the future, due to the recent RMB depreciation, China Mobile is not as attractive as it once was since the company earns most of its income in RMB. Trade tensions between the US and China could get worse, which could see China's RMB fall further. So, if China Mobile's earnings fall in Hong Kong dollar terms, its dividend might decline as well for shareholders.
Given that HKT Trust earns most of its income from the US-dollar pegged Hong Kong dollar, the stock is more dependable from that perspective for investors.
Furthermore, China Mobile is also a state-owned enterprise (SOE) and has been known to be called into "national service" by the government given how the telecoms sector is seen as one of strategic importance. This may cause the company to act in a way that is not in the best interest of shareholders. By being private, I believe HKT Trust has much fewer conflicts of interest.
Both companies should benefit from the rollout of 5G in the coming years as the faster speeds and more potential applications will likely increase data revenues yet HKT Trust looks to be the more stable in terms of earnings over the coming years.
Winner: HKT Trust
From a yield and payout perspective, China Mobile is the better choice. From a shareholder and dividend growth perspective though, HKT Trust is the winner. Although HKT Trust's stock price might decline if the current political tensions in Hong Kong worsen, it is the better dividend stock overall.