Is This Dividend Stock A Better Buy Than Verizon Communications Inc. and AT&T Inc.?

By Markets Fool.com

When many investors think of high-yielding telecom stocks, they often think of AT&T or Verizon . Both stocks offer dependable dividends, but usually underperform the overall market.

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Therefore, investors looking for both income and growth should take a look at an overseas telecom instead -- China Mobile , the world's largest mobile phone operator by network size and subscribers. Shares of China Mobile have rallied 40% over the past 12 months, easily outperforming AT&T and Verizon's respective gains of 8% and 6%.

Source: Wikimedia Commons, Vmenkov.

In addition to that impressive growth, China Mobile has a 5-year average dividend yield of 3.5%, compared to AT&T and Verizon's respective yields of 5.4% and 4.9%. Let's take a closer look at China Mobile and see whether or not this telecom giant belongs in your income portfolio.

China Mobile by the numbers
China Mobile, along with its former parent company China Telecom and China Unicom , are all state-owned companies. China Mobile, 70% owned by the government and the largest of the three, controlled 62% of the wireless market last year, compared to 23% for China Unicom and 15% for China Telecom. China Mobile controls the majority of the 2G market and roughly half of the 3G market.

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In late 2013, China started issuing 4G licenses, clearing the way for China Mobile to offer its own version of Apple's iPhone. Last October, China Mobile signed a $970 million deal with Nokia to boost the development of its 4G network with Nokia's software, equipment, and services.

China Mobile first started reporting 4G user growth last February, when 4G customers only accounted for 0.2% of its customer base. By December, 4G customers accounted for 11% of China Mobile's total customer base, which grew 4% to 806.6 million during that period.

China Mobile's revenue rose 3.9% year-over-year during the first three quarters of 2014. While that growth might merely seem comparable to AT&T and Verizon's single-digit top line growth in recent quarters, investors should note that China Mobile has easily outpaced both companies in terms of revenue growth over the past five years.

CHL Revenue (TTM) Chart

Source:YCharts

However, profit attributable to shareholders fell 9.7%. Like its American counterparts, China Mobile's bottom line is weighed down by network upgrade costs, which have soared alongside its revenue growth.

CHL Total Operating Expenses (TTM) Chart

Source:YCharts

Catalysts and risks
Last December, 58% of China Mobile's users still used lower margin 2G services, and the majority of the company's revenue was generated by voice calls. But after the company's 4G upgrade completes, a shift from voice to data will occur as users upgrade their older 2G and 3G devices to 4G ones. China Mobile believes that its 4G subscribers will rise 66% year-over-year to 150 million by the end of 2015 and double to 300 million by 2016.

China's smartphone market also hasn't stopped growing yet. Research firm eMarketer estimates that smartphone penetration in China will rise from 38% of the population in 2014 to 51% in 2018. About half of the Chinese mobile market will be comprised of smartphones this year, with the low end controlled by local players like Xiaomi and the high end dominated by Apple.

However, China Mobile also faces near term risks. First, the government might throttle the company's growth with anti-monopoly regulations to help China Telecom and China Unicom gain market share. Second, its shift to 4G will likely cannibalize voice and text messaging revenue with the use of mobile messaging apps, which makes the transition a tough balancing act to pull off. All these factors will keep China Mobile's bottom line under pressure in the near term.

The verdict
Despite these challenges, I own shares of China Mobile for four simple reasons -- it's the largest telecom company in China, it could more than triple its 4G user base within two years, it pays a decent dividend, and it's well positioned to profit from China's newfound obsession with the iPhone 6. And despite its big rally over the past year, China Mobile remains surprisingly cheap at 15 times trailing earnings, compared to AT&T and Verizon's respective P/Es of 29 and 20.

The article Is This Dividend Stock A Better Buy Than Verizon Communications Inc. and AT&T Inc.? originally appeared on Fool.com.

Leo Sun owns shares of Apple and China Mobile. The Motley Fool recommends Apple, China Mobile, and Verizon Communications. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.