Qualcomm Dividend Stock Analysis

This is a guest post from Sabeel at Roadmap2Retire.

Qualcomm is the world leader in wireless digital communication products. The company’s products or licenses can be found in almost every mobile device produced in the recent years. As a result, the company’s revenue is diverse and robust. Qualcomm is broadly segmented into three segments:

• Qualcomm CDMA Technologies (QCT), which manufacturers and designs chipsets
• Qualcomm Technology Licensing (QTL), which licenses the technology developed by Qualcomm
• Qualcomm Strategic Initiatives (QSI), which is comprised of the company’s Qualcomm Ventures and Structured Finance & Strategic Investments division.

In 2014, Qualcomm generated 70% of its revenue from QCT and 28% from QTL.

Corporate Profile

Qualcomm designs, develops, manufacturers and markets digital communication products. Qualcomm’s business segments include mobile device chipset manufacturing, mobile device royalties and strategic investments. Qualcomm is the leader in ARM-based chipset processors which can be found in the bulk of Android (GOOG), BlackBerry (BBRY) and Windows (MSFT) mobile devices. The licensing segment is used by almost all mobile device manufacturers including Apple (AAPL). The real winner from the smartphone/tablet/connected-cars wars really is Qualcomm. Qualcomm charges royalties on each handset sold based on its technology and one time licensing fees from handset vendors to use its proprietary technology.

The Case for Investing in Qualcomm:

• Qualcomm has a robust business model that stands to benefit from development and deployment of wireless technology.
• Qualcomm is building chipsets and developing technology to provide one-stop solutions between various wireless technologies such as telecom protocols, WiFi, Bluetooth etc.
• Qualcomm gets a cut from the sale of almost every mobile device as the company has cornered the market and owns a lot of products and patents in the CDMA/OFDMA space. As the rest of the world moves from the 2G to 3G to 4G, Qualcomm’s cash reserves will keep getting topped up.
• New technology fonts getting developed provide plenty of lucrative options and deals available for Qualcomm such as wearable technologies, drone technologies, vehicular networks etc.

Risks:

• The recent anti-competitive case in China is now settled after Qualcomm agreed to pay close to $1B in fine. There has been talk of South Korea follow suit with a similar case. Are more countries to follow?
• Apple and Samsung might come up with their own chipsets. While this will hurt Qualcomm’s chipset business, at least the cellphone companies will still need to pay the licensing fees, as QCOM owns a lot of patents in the space.
• Qulacomm is seeing smaller margins as the world moves to 4G.
• Market saturation in the smartphone and tablet market.
• Currency fluctuations and the headwinds from the strong US$.

Dividend Stock Analysis

Financials

Expected: Growing revenue, earnings per share and free cash flow year-over-year looking at a 10-year trend. A manageable amount of debt that can be serviced without affecting future operations.

Actual: Qualcomm has a robust business model that relies of increased sale of Qualcomm chipset or licensing of Qualcomm products & patents. The revenue has increased year-over-year and the company expects the trend to continue for the foreseeable future. The return on equity is 21.2%. Qualcomm also has no debt on its books, something very rare in to see in a most of the companies these days.

Dividends and Payout Ratios

Expected: A growing dividend outpacing inflation rates, with a dividend rate not too high (which might signal an upcoming cut). Low payout ratio to indicate that the dividends can be raised comfortably in the future.

Actual: Qualcomm has been paying dividends since 2003 and has increased the dividends from then on. The company has a track record of raising dividends for 12 years and has a 1, 3, 5 and 10 year dividend growth rate (DGR) of 23.8%, 24.5%, 19.2%, and 21.7% respectively. The current payout ratio is 33.5% leaving plenty of room for future increases.

Outstanding Shares

Expected: Either constant or decreasing number of outstanding shares. An increase in share count might signal that the company is diluting its ownership and running into financial trouble.

Actual: Qualcomm has reduced the number of shares for years, although the company saw an increase in shares in 2012 and 2013. The number of shares have continued to decrease since then as Qualcomm has announced share repurchases of upto $5B each year in 2013 and 2014.

Book Value and Book Value Growth

Expected: Growing book value per share. Sometimes stock repurchases are authorized by the board to reward management at the expense of book value.

Actual: Book value has continued to grow over the years and it has fallen in the last few months.

Conclusion

Qualcomm is one of the best plays when considering investments in the technology space. The company has a strong and robust business model that is used in various fields of communication. Qualcomm has recently come under pressure from the Chinese government and was fined approx. $1B for anti-competitive behavior. However, Qualcomm can now put that behind itself and move forward. The company feels strongly positive about its future and recently raised its guidance. A company with no debt, Qualcomm has a very bright future ahead.