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Risk-Reward With SK Telecom

- By Jonathan Poland

For some time now Seoul, South Korea, has been dubbed the "leading digital city" and "tech capital of the world," which is interesting considering its proximity to North Korea, the most repressed country on earth. The city is also home to big names in technology such as Samsung (005930.KS), LG Electronics (066575.KS) and SK Telecom (SKM), and was the first to roll out 5G wireless.


Today's technology is rather useless without connectivity, and soon the world could bypass our traditional networks altogether thanks to 5G. Korea is taking a leadership position in rolling out this technology with the country's three largest telecom firms -- SK Telecom, Korea Telecom and LG Uplus -- launching 5G networks to commercial users in December.

SK Telecom has roughly half of the market in South Korea's mobile telecom industry with 24.7 million customers, making it the country's largest operator. This is great from a survival standpoint, but it will need to grow passed the small Korean population if it wants to continue growing. In the last decade, operating income has declined as margins have shrunk, and SK Telecom hasn't been able to increase revenue at all since 2014. It settled for share buybacks to boost earnings per share and book value -- each have doubled since 2009.

Without its leadership position, the company would be in trouble, but compared to the debt-laden wireless carries here in the U.S., SK Telecom looks rock solid financially. Long-term debt is less than 3x net income at $6.1 billion. And, while the company does spend more than 100% of its earnings on CapEx, the recurring payments from its subscribers will more than help it continue this practice.

This year, the company is expected to earn over $2.00 per share and pay out over a dollar in dividends. The stock trades in a tight range, but with the introduction of Korea's gigabyte per second mobile phone data service, both earnings and dividends should be secure for some time. And, now that it has eyeballs on its devices, it will look to better monetize them, with ideas like eSports, Augmented Reality and memory chips.

The point is with north of 25 million customers, it has options. With the stock fairly priced and tensions between north and south cooling even further, it's not a bad idea to take the dividend and see what happens with SK Telecom.

Disclosure: I am not long or short SK Telecom .

This article first appeared on GuruFocus.