Image Source: Pixabay

There is no exact definition for blue chip stocks. We define it as a stock with at least 10 consecutive years of dividend increases. We believe an established track record of annual dividend increases going back at least a decade shows a company’s ability to generate steady growth and raise its dividend, even in a recession.

As a result, we feel that blue chip stocks are among the safest dividend stocks that investors can buy. This installment of the 2022 Blue Chip Stocks in Focus series will analyze the computer technology company Qualcomm (QCOM).

Business Overview

Qualcomm, first known as “Quality Communications,” started in 1985 by Dr. Irwin Jacobs. At that time, the company provided a product and service which enabled long-haul trucking companies to locate and message drivers.

Today, the company develops and sells integrated circuits for use in voice and data communications. The chip maker receives royalty payments for its patents used in devices that are on 3G and 4G networks.

Qualcomm is the world’s largest wireless chip vendor and supplies the majority of handset makers with leading-edge processors. It also sells RF-front end modules for use in smartphones, and chips for automotive and Internet of Things (IoT) markets.

Qualcomm reported third quarter FY 2022 results on July 27th, 2022. Revenues soared 36% to $10.9 billion. Adjusted earnings-per-share of $2.96 was 54% higher than the $1.92 in the previous year.

Source: Investor Presentation

Revenues for Qualcomm CDMA Technologies, or QCT, grew 45% to $9.4 billion. Handsets, RF front-end, Automotive, and Internet of Things grew 59%, 9%, 38%, and 31%, respectively. Qualcomm Technology Licensing, or QTL, was higher by 2% to $1.5 billion.

During the quarter, Qualcomm repurchased 4 million shares for $500 million. Additionally, the company returned another $842 million in dividends to shareholders.

Leadership revised its 2022 guidance and sees total revenues coming in between $11.0 billion to $11.8 billion. Adjusted earnings-per-share of $3.00 to $3.30 is expected for the fourth quarter. We estimate that Qualcomm can generate $12.54 in earnings-per-share for the full fiscal year 2022.

Growth Prospects

Qualcomm is a mature technology company and has grown its earnings-per-share at roughly 6.6% per year over the last decade. In the most recent quarter, the company experienced strong growth across all four of its main segments. The company will continue to focus on growing each of its divisions, being handsets, RF front-end, automotive, and Internet of Things.

The company’s Snapdragon chips are considered the premium and high-tier smartphone chip for Android devices. Growth in demand for 5G will also benefit the company’s handset division, and the company anticipates that 5G handset shipments will reach about 85% of total handset shipments in 2024, from about 40% in 2021.

Qualcomm estimates that their serviceable addressable market will grow from $33 billion in 2021 to $46 billion in 2024, a 12% compound annual growth rate.

The automotive segment has the strongest growing serviceable addressable opportunity (SAM) out of all divisions. Qualcomm anticipates the automotive SAM to grow by 36% per annum from 2021 into 2026, from $3 billion to $14 billion. The design-win pipeline has reached $13 billion, and the company plans to capitalize on an increased demand for telematics, connectivity, and digital cockpit content, including autonomy.

An additional boost to earnings-per-share will be achieved with continued share repurchases. The company has on average and over the long-term repurchased roughly 5% of its outstanding shares per year.

Lastly, Qualcomm can grow through strategic acquisitions. One such recent acquisition is NUVIA, a world-class CPU and technology design company, which Qualcomm purchased for $1.4 billion. With NUVIA, Qualcomm expects to create and release a new set of high-performance computing platforms.

These next-gen CPUs will be integrated into flagship smartphones, laptop, digital cockpits, advancer driver assistance systems, extended reality, and infrastructure networking solutions. We expect Qualcomm will grow earnings-per-share at a rate of 7% annually in the intermediate-term.

Competitive Advantages & Recession Performance

Qualcomm’s leading position in its industries and best in-class Snapdragon processor are the company’s most significant competitive advantages. This leadership position affords the company somewhat of a moat. The Snapdragon processor is a leader in performance in the smartphone world. It also is the processor found in the majority of Android handsets.

The company is not immune to recessions, as demand for the products where Qualcomm provides internal components can fluctuate depending on the overall economic environment. However, Qualcomm’s semiconductors are involved and integrated in a very wide array of products, so there is some resilience.

During the great recession, the company suffered a near 16% decline in its earnings-per-share, which compared favorably to a great amount of companies which were more significantly impacted.

These qualities have enabled Qualcomm to grow its dividend every year for 20 years. Over the last nine years, the dividend grew at nearly 13% per year, and in the last five years, the dividend grew at nearly 6.5% per year. We estimate that the company can continue growing the dividend in line with earnings growth.

Valuation & Expected Returns

Shares of Qualcomm have traded for an average price-to-earnings multiple of around 15.6 and 17.0 over the last ten and five years, respectively. Shares are now trading below this average, which indicates that shares could be undervalued at the current 11.6 times earnings.

Our fair value estimate for Qualcomm stock is 16.0 times earnings. If this proves correct, the stock will benefit from a 6.7% annualized gain in its returns through 2027. Shares of Qualcomm currently yield 2.1%, which is below its average yield of around 3%. On a dividend yield basis, QCOM shares seem to be trading above fair value.

The current dividend payout is adequately covered by earnings, with room to grow. Based on expected fiscal 2022 earnings, QCOM has a payout ratio of only around 25%. We anticipate continued high single-digit dividend increases in the years to come.

Putting it all together, the combination of valuation changes, EPS growth, and dividends produces total expected returns of 15.6% per year over the next five years. This makes Qualcomm a buy.

Final Thoughts

Qualcomm is the world’s largest wireless chip vendor and supplies the majority of handset makers with leading-edge processors. The company has increased its dividend for 20 consecutive years, and we see this growth continuing.

The company’s chips are involved in a variety of technology markets, and the company’s growth thesis remains intact. The 2.1% dividend yield is not impressive on its own, but combined with growth and the potential valuation tailwind, total returns are solid.

With strong total return expectations of 15.6% per year over the next five years, Qualcomm stock is a buy for long-term dividend growth investors.

More By This Author: