Published December 2nd, 2016 by Bob Ciura
Large-cap technology stocks are a great place to look for dividend growth investors.
Income investors traditionally have not been able to rely upon tech stocks for dividends. Even the tech stocks that do pay dividends usually have short dividend histories.
But income investors should take a closer look at Qualcomm (QCOM). It has a 3.3% dividend yield, and has been growing its dividend by double-digit rates for several years.
Qualcomm has raised its dividend 13 years in a row. This makes it a Dividend Achiever. You can see the entire list of all 273 Dividend Achievers here.
Qualcomm’s current dividend yield trounces the 2% average dividend yield of the S&P 500. Even better, the company’s future dividends are set to grow by 10% or more each year.
Business Overview
Qualcomm is a semiconductor manufacturer. It sells chips and processors, mostly used in smartphones. It is a huge company—Qualcomm has a $94 billion market cap and generates more than $23 billion in annual revenue.
Qualcomm’s technology empire was built largely on the global smartphone boom of the past decade. But the smartphone industry may soon be at its peak. Smartphones have become saturated in many major markets, causing industry growth to level off recently.
Source: Fiscal 2016 Earnings Presentation, page 8
This has caused Qualcomm’s device sales to flat-line as well for the past few years. As global smartphone sales stall, Qualcomm’s royalties stall as well.
For Qualcomm, its challenges are magnified by a recent issue in China. This is a key market for the company, but Qualcomm has struggled with licensees under-reporting device sales over the past year.
This is why Qualcomm’s revenue declined 6.8% in fiscal 2016. Still, Qualcomm generated $6.9 billion of free cash flow last year. Free cash flow represented 29% of revenue.
To get revenue growing again, Qualcomm is pointing itself in a new direction. This is a period of transition for Qualcomm.
Source: Qualcomm to Acquire NXP Presentation, page 4
Put simply, Qualcomm believes the past three decades were defined by connecting people. The future, however, will be defined by connecting inanimate devices.
The Internet of Things, or IoT, is one of the most compelling growth catalysts in technology. Envision a world in which devices of all sorts—including not just phones and computers, but also vehicles, appliances, and more—are in constant communication.
In the not-too-distant future, your refrigerator will know when you run out of milk and will order more for you. And, after a short while, a drone will drop off a gallon of milk at your front door.
This is one scenario of many that sounds like science fiction, but could come along sooner than you think. Qualcomm will be at the precipice of this technological breakthrough, and is investing aggressively to take a leadership position in this category.
Growth Prospects
Qualcomm’s three most attractive growth catalysts moving forward are:
- 5G rollout
- Internet of Things (IoT)
- Acquisitions
First, mankind’s love affair with out smartphones have created a seemingly insatiable thirst for data. Currently, 3G and 4G broadband is still rolling out across many parts of the world, particularly emerging markets like China and India.
But in more developed parts of the world, 3G and even 4G are becoming outdated. Consumers, like those in the U.S., are using ever-increasing amounts of data that require stronger connections.
As a result, Qualcomm is already envisioning 5G rollout as its next key growth engine. 5G is expected to support faster data rates and wider bandwidths of spectrum. Management expects 5G to begin rolling out by 2019.
This will be a great opportunity for Qualcomm to reignite growth in mature economies like the U.S.
5G will have a wide array of applications, because it will be scalable and adaptable across a variety of uses. Just a few potential uses include autonomous vehicles, ultra-high definition 4K video, and even remote medical procedures.
The new capabilities will enable the unprecedented world of Internet of Things, or IoT.
Rather than plowing considerable time and financial resources into R&D, Qualcomm can simply acquire companies to provide entry into these markets.
Qualcomm is making a huge splash by acquiring NXP Semiconductor in a $47 billion deal.
NXP fits seamlessly into Qualcomm’s portfolio because it is also a is a major semiconductor manufacturer. It has a major presence in autonomous vehicles such as self-driving cars and unmanned drones.
It will significantly further Qualcomm’s ambitions in the IoT and security.
Looking ahead, it is safe to say that Qualcomm will no longer be just a smartphone chip company.
Source: Qualcomm to Acquire NXP Presentation, page 8
Qualcomm’s aggressive M&A is made possible by its pristine balance sheet.
Competitive Advantages
Qualcomm’s massive cash hoard is a competitive advantage. At the end of last quarter, the company held $32 billion in cash, marketable securities, and long-term investments on its balance sheet.
Its huge cash position allows Qualcomm to invest in R&D and acquisitions, while continuing to reward shareholders with rising dividends and share buybacks.
Another critical competitive advantage for Qualcomm, and all tech companies for that matter, is intellectual property. Qualcomm has a huge patent portfolio.
According to the company, Qualcomm’s patent portfolio is the most widely and extensively licensed in the industry, with over 330 licensees.
Qualcomm finances its intellectual property and innovation with considerable research and development investment. Its R&D spending over the past three years is as follows:
- Fiscal 2016 R&D expense of $5.2 billion
- Fiscal 2015 R&D expense of $5.5 billion
- Fiscal 2014 R&D expense of $5.5 billion
These competitive advantages and Qualcomm’s growth catalyst are set to provide shareholders with a long runway of future dividend increases.
Dividend Analysis
On the list of Dividend Achievers, there are many stocks with above-average yields. The 3.3% dividend yield that Qualcomm offers may seem routine. But Qualcomm is unique, because of its high dividend growth potential.
Qualcomm’s tremendous balance sheet and high cash flow will allow it to raise its dividend at rates that are far higher than many other Dividend Achievers.
Consider that, in a highly challenging year, Qualcomm still managed a 10% dividend increase in 2016. Its dividend growth rate stands to accelerate from here, thanks to its growth catalysts.
And, the company allocates billions of dollars each year to share repurchases. These buybacks help boost earnings-per-share, by reducing the number of shares outstanding.
Source: Fiscal 2016 Earnings Presentation, page 12
Despite Qualcomm’s impressive dividend growth, it still has a modest payout ratio.
Final Thoughts
Qualcomm is not typically associated with other well-known dividend stocks. But it deserves a place in an income investor’s portfolio.
Qualcomm generates huge cash flows and has an excellent balance sheet. It is positioning itself to be on the forefront of new technologies, which will fuel its future growth.
The stock has an attractive 3.3% dividend yield. And, its growth catalysts should continue to support double-digit annual dividend increases going forward.
