Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn’t sustainable. In others, the dividend is so low, it’s not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
This week, I’m going to stick with the tech sector and highlight the king of mobile chip technology, QUALCOMM, Inc. (NASDAQ:QCOM) .
How to keep a wireless company down
There are really only two things that can keep Qualcomm from being a dominant force in mobile technology — product commoditization and oversaturation.
Given Americans’ insatiable demand for smartphones and tablets, this didn’t seem like it’d be a concern for a very long time. However, as we’ve recently discovered through Apple Inc. (NASDAQ:AAPL)‘s woes, commoditization and market saturation are actually a threat to stymie Qualcomm’s growth. Apple reduced supply orders for its iconic iPhone 5 after demand for the product simply didn’t meet it and investors’ high expectations. In addition, aggressive competition and innovation from Samsung and Google Inc (NASDAQ:GOOG), whose Android operating system is the dominant global OS, has pressured margins and caused consumers to question the premium often paid to own an Apple product.
Luckily, Qualcomm shareholders can breathe a sigh of relief because 1. Apple isn’t dying, and 2. The Qualcomm brand is much more than just Apple.
What it’s like being the king of wireless connectivity
As I noted in late January, both Qualcomm and Skyworks Solutions Inc (NASDAQ:SWKS) comprised my top two smartest ways to play the ongoing mobile revolution. The reasoning behind my selection of these two relates to Qualcomm’s unparalleled position as the leader in wireless CDMA technologies whose chips enable connectivity on nearly all 3G and 4G LTE phones, and Skyworks’ unique position as the power-amplifying module producer of choice in many top-rated mobile devices, like the iPhone and Samsung Galaxy series phones.
However, QUALCOMM, Inc. (NASDAQ:QCOM)’s reach extends far beyond just CDMA technologies (as Skyworks, RF Micro Devices, Inc. (NASDAQ:RFMD) and TriQuint Semiconductor (NASDAQ:TQNT) found out just weeks ago). On top of being the sole supplier for cellular baseband processors in the iPhone 5, and laying claim to about half the components in the Nokia Corporation (ADR) (NYSE:NOK) Lumia smartphone, the always innovative Qualcomm introduced the RF360 chip last month. This chip is able to deal with band-fragmentation on the front-end and would practically make RF chips obsolete in upcoming 4G LTE models. Luckily for Skyworks, which has strong ties to Apple, this isn’t a huge concern, but for a company like RF Micro Devices, which has been playing catch-up and trying to move away from 2G and 3G devices, the blow could be more crippling.
What’s truly phenomenal is that with the addition of this front-end capable RF chip, when combined with its already dominant Snapdragon processor and Gobi LTE modems, Qualcomm has basically become the first vertically integrated global device company. Literally, there isn’t another tech company that can hold a candle to the royalties Qualcomm will reap from these wireless technologies over the next decade.
We can see this domination translate easily over to its bottom-line earnings results. In QUALCOMM, Inc. (NASDAQ:QCOM)’s most recent quarter, the mobile device chip maker reported just your typical 29% year-over-year revenue growth to $6.02 billion, a 35% improvement in adjusted EPS to $1.09, and “just” $28.4 billion in cash and cash equivalents!
A heaping mound of shareholder incentives
Being a cash-flow juggernaut means one important thing for shareholders: a growing sense of equity-building activities on the part of Qualcomm’s management team. Just last week, Qualcomm announced that it’d be replacing an existing $4 billion share repurchase program that had around $2.5 billion left with a $5 billion share buyback program with no expiration date. The more shares Qualcomm repurchases, the more profitable it should be on a per-share basis and the more valuable shareholders’ holdings should become.
But, Qualcomm wasn’t done there. On top of the share buyback program, Qualcomm boosted its quarterly dividend by 40% to $0.35! Breaking out the fancy calculator, you’ll see that Qualcomm has raised its dividend by a massive 600% over the past decade, or a whopping 21.5% average boost per year! See for yourself:
Source: Nasdaq.com. *Estimated payout based on $0.35 quarterly payout.
Projecting out the new annual payout, Qualcomm’s yield will rise from a modest 1.5% to a more respectable 2.1%. Remarkably, even paying out $1.40 annually, Qualcomm’s projected payout ratio in 2014 is less than 29% of the company’s projected profits. To me, that signals another opportunity for a dividend boost around this time next year — especially given that it generated $1.85 billion in free cash flow just last quarter!
Foolish roundup
There really isn’t much argument needed as to why QUALCOMM, Inc. (NASDAQ:QCOM) is a fantastic company beyond its innovative capabilities and unsurpassed vertical integration. There isn’t a wireless device company that will even be within a stone’s throw of Qualcomm for another five years in my best “guesstimate.” On top of that, Qualcomm is making all the right moves that it took Apple so long to make by rewarding shareholders early and often with share buybacks and big dividend increases. This is definitely one technology dividend you can sock away in your portfolio and forget about for five or more years!
The article 1 Great Dividend You Can Buy Right Now originally appeared on Fool.com.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Qualcomm.
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