Wednesday, March 10, 2010

Capitalize on China’s Growth with these dividend stocks

China seems to be the engine of global growth these days. The country has managed to turn itself into the manufacturing facility of the world, producing almost everything that consumers in the western world need. It is being said that investing in China in 2010 is similar to investing in USA in 1910 or investing in the UK in 1810. Whether this turns out to be true or not, the Chinese economy has managed to expand rapidly over the past decade, fueled by demand for cheap goods which its skilled and low-cost labor force produces for worldwide markets. While there are plenty of ways to invest in the Chinese economic growth, including Chinese listed ADRs traded on the NYSE or Nasdaq, few have a long history of dividend increases, which would make them an interesting income play.

Most global companies do have a presence in China however. Some of these companies have had operations in the country for years, and have also developed a strategy for expanding their business there, which would provide strong earnings and dividend growths for the future. Some of these companies include well known dividend stocks such as McDonald’s (MCD), Coca Cola (KO), Wal-Mart (WMT) and Philip Morris International (PM).

While Philip Morris International (PM) does face declining demand in Western Europe, which accounted for a little less than 50% of its operating income, the company could benefit from growth in emerging markets such as China or India as well as from strategic acquisitions. The company’s low penetration in the Chinese market, which represents one third of the worldwide demand for tobacco products, could present an attractive opportunity. PMI has reached an agreement with the China National Tobacco Company (CNTC) for the licensed production of Marlboro China and the establishment of an international equity joint venture outside of China. In August 2008 production of Marlboro began under license in two factories. The joint venture has successfully launched three Chinese heritage brands in six international markets. Check my analysis of the stock.

Coca Cola (KO) has operated in China since 1979 and was a major sponsor of the recent summer Olympic Games held in Beijing. The company is planning to triple the size of its sales in China over the next decade, and double the size of its bottling plants in the country. China is the third largest country for Coca Cola by revenues, and it’s also a big part of the company’s expected growth in sales over the next decade. Coca Cola is already the largest soft drinks brand in China and its volumes are twice the size of rival PepsiCo (PEP). The potential of the Chinese market is immense – last year there was an average per capita annual consumption of 28 Coke products in China, which was much lower than the 199 Coke products in per capita consumption in Brazil (source). Check my analysis of the stock.

Wal-Mart (WMT) currently has 267 locations in China, operating under Wal-Mart or Trust Mart’s names. The company had 3615 international locations at the end of 2008. There is still room for growth in Chinese operations, fueled by the increase in number of middle-class families in the country. For Wal-Mart, China represents the biggest frontier since it conquered America. China's voracious consumers are pushing retail sales to a 15 percent annual growth rate; that market will hit $860 billion by 2009, according to Bain & Co. (source). Check my analysis of the stock.

McDonald’s (MCD) currently owns over 2000 stores in China. The company has an ambitious plan to expand operations by developing 500 new locations in 3 years. McDonald’s opened 146 restaurants in 2008 and earlier this year expected to open 175 restaurants in 2009. The company has been able to increase sales volumes by expanding its menu of items, offering convenient store hours and opening drive-thrus in the process. Restaurants with drive-thrus are more likely to achieve higher sales and satisfy the demands of the increasingly mobile society in China. Expanding store hours and adding breakfast items to the menu is another opportunity for internal growth at Mcdonald’s Chine operations. Check my analysis of the stock.

McDonald’s (MCD), Wal-Mart (WMT) and Coca-Cola (KO) have each raised dividends for more than 25 years in row. Expanding their operations in China would be the cornerstone that would provide the necessary earnings growth for these dividend aristocrats to be able to raise distributions for the next two decades.

Full Disclosure: Long MCD, PM, WMT, KO

Relevant Articles:

- Philip Morris International versus Altria
- Seven dividend aristocrats that Buffett owns
- Dividend Aristocrats List for 2010
- Valuing Dividend Stocks

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