Apple Inc. (AAPL), China Mobile Ltd. (ADR) (CHL): You’re Still Forgetting This Growth Driver

Apple Inc. (NASDAQ:AAPL) has been struggling to prove that it still has growth ahead of it. In order to put that question to rest, it either needs to bring out a new revolutionary product or find a new market with lots of customers. On the latter count, China is a market close enough to touch that Apple Inc. (NASDAQ:AAPL) hasn’t been able to fully tap yet.

The Drop

It seems like the big drop in Apple Inc. (NASDAQ:AAPL) shares has been going on since the company initiated a dividend. A push by a dissident shareholder recently led the company to hike the dividend by 15% and promise to return more money to shareholders via massive share buybacks. While these are both shareholder friendly acts, they are what mature companies do.

It is exactly that image that has caused the company’s shares to falter. The company is increasingly looking like a consumer products company, selling legacy devices and not much more. Part of the problem is Apple Inc. (NASDAQ:AAPL)’s penchant for keeping everything it builds in-house, unlike a Google Inc (NASDAQ:GOOG) which shares liberally and benefits from the growth of its partners.

However, the company’s own success is clearly part of the problem, too. After Steve Jobs returned to head the company, a series of truly industry changing devices was brought out. The iPod started it all, followed by the iPhone, and more recently the iPad. While there have been a few flops along the way, such as Apple TV, the winners have more than made up for the losers.

A Hard Act to Follow

Essentially, Apple Inc. (NASDAQ:AAPL)’s own success set the bar high. With a less than inspiring iWatch concept being run around, innovation seems likely to be a weak spot in the near term. That means that Apple Inc. (NASDAQ:AAPL) needs to sell more gear to keep its top and bottom lines growing. Hard to do in the predominantly mature markets it serves.

The one market that seems tailor made for Apple to continue supporting torrid growth is China. That country, however, isn’t the easiest market to enter. For example, the largest cell phone company is China Mobile Ltd. (ADR) (NYSE:CHL). It is, basically, controlled by the Chinese government.

It has around 600 million customers and controls almost two-thirds of the cell market in country. That’s a huge opportunity, but one that Apple hasn’t been able to tap. And China’s CCTV, a government owned broadcaster, having accused Apple of treating Chinese customers “differently” than it treats customers in other countries doesn’t make a deal look any more likely. Apple’s apology doesn’t change much.

Whetting the Appetite

While there are some technical difficulties to making a deal, like China Mobile Ltd. (ADR) (NYSE:CHL)’s use of non-industry standard technology, those details could probably be worked around easily enough. And a partnership would make sense for both companies. Apple would get access to a market it covets and China Mobile Ltd. (ADR) (NYSE:CHL) would get a phone that customers want. Moreover, data usage would likely increase revenues at the industry giant at a faster clip then it is seeing today without the iPhone.

The recent results at China Telecom Corporation Limited (ADR) (NYSE:CHA) prove this out. The company is the third tier player in the market with only around 160 million subscribers. It started selling the iPhone last year. Although the cost of selling the new phone was a drag at first, the recently ended quarter’s results show that the partnership is starting to pay off.

The company posted solid increases in customers and data usage. It makes the company’s future look brighter than it did before the deal. Income investors probably won’t be too interested, since the stock yields less than 2%, but growth investors should take a look. Meanwhile, watch China Mobile Ltd. (ADR) (NYSE:CHL)’s iPhone ambitions as a potential catalyst to improved business performance.

But China Mobile Ltd. (ADR) (NYSE:CHL)’s results are really only a tease for Apple and its shareholders. In a market that is so large, Apple is only dealing with a second stringer. If the company wants to keep the top line going, it needs a deal with China Mobile Ltd. (ADR) (NYSE:CHL). The sooner the better.

A Floor

The company’s recent dividend moves have created something of an interesting situation for investors. With a yield of around 3%, Apple has a decent dividend yield. In fact, many would even call it enticing. That should put a floor under the shares. And it isn’t as if the company is struggling. It still has industry leading products that are selling well.

Income investors should be examining Apple at this point. The question still boils down to whether or not the company can continue to grow its business over the long term, but the risk/reward profile is materially altered by the 3% or so dividend yield. For example, even if it takes a few years to fully crack the China market, Apple shareholders still get the benefit of the dividend while they wait.

It doesn’t take much of an imagination to think that other mobile operators in China will see the results at China Mobile Ltd. (ADR) (NYSE:CHL) and want to get in on the action. While that won’t happen overnight, the potential is huge. Income investors who’ve shied away from Apple because of its previous growth orientation should review that decision.

The article Close Enough To Touch originally appeared on Fool.com and is written by Reuben Brewer.

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