Investing in State-Owned Monopolies

This article published with permission from InvestmentU.com.

Growing up, our family Monopoly games were raucous affairs with a lot of shouting (and when necessary, wrestling). My younger brother John was always in charge of the cash because no one else was deemed trustworthy.

In retrospect, most of my six siblings never really got the game at all. They carefully managed their cash and picked up random properties. This allowed them to stay in the game for a long time but made ultimate victory impossible.

As for me, I always went for the kill with a strategy of feast or famine.

It was either a great monopoly, like Boardwalk and Park Place, or I would crash and burn and then bolt to play basketball with the neighborhood gang.

Just why is it that so many people are bad at the game of Monopoly?

I think it’s because we’re taught at a tender age that tycoons adept at cornering markets are the greedy bad guys. This belief is compounded when we go to college and economics professors rant about evil monopolies and the need to “regulate” the free market.

Enter Carlos Slim

Apparently, Carlos Slim, the wealthiest tycoon in the world according to Forbes, never studied economics.

Slim’s fortune was built on the back of Mexican telecom monopolies and, as a hobby, he bailed out The New York Times. Companies controlled by Slim have captured 80% of Mexico’s telephone lines, 70% of the cellphone market and account for an incredible 34% of the value of the country’s entire stock market.

Maybe monopolies aren’t all that bad?

Lasting monopolies are tough to find in America, but there are plenty of them in emerging markets.

Why?

The best way to convince government regulators to protect your market is to be owned by the government itself.

And there are many of these monopoly-like state-owned and -controlled giants in emerging and frontier markets.

The poster country of this “state capitalism” is China and one high-profile monopoly is China Mobile (NYSE: CHL). The government’s 70% ownership stake is a strong incentive to protect the company’s dominant market position.

China Mobile: The poster child

So despite my strong personal distaste for state capitalism, now may be a good time to look at China Mobile when many are questioning the country’s growth prospects.

For 2011, the company’s customer base grew 11.6% to reach 650 million with profits of $19.9 billion. As a defensive consumer business with a 4.1% dividend yield, CHL should hold up rather well in the toughest of markets.

This stock has done a lot better than that so far in 2012 — it’s up 15.5%. Despite this impressive surge, the stock is trading at only a bit over 10 times 2012 expected earnings.

China Mobile’s trump card is a $50-billion stockpile of cash reserves ($13 per share) that is sure to cover (or buy out) even the most intrepid of its competitors.

So don’t be shy about investing in monopolies. After all, only one company (Parker Brothers) makes the game of Monopoly.

Carl Delfeld is a senior analyst at InvestmentU.com. See more articles by Carl here.