NEW YORK (TheStreet) -- Worldwide smartphone unit shipments are expected to grow at nearly 10% a year over the next several years. Smartphone unit growth will be strongest in developing markets. In developed markets, the "internet of things" -- a catch phrase for the litany of new devices requiring wireless internet connections around the home -- is expected to grow at 17.5% a year through 2020.
Wireless technology giant Qualcomm (QCOM - Get Report) is uniquely positioned to take advantage of this growth. The company's technology license agreements with both Apple (AAPL) and Samsung (SSNLF), the two largest smartphone companies in the world, allow Qualcomm to profit from rising smartphone unit sales. Qualcomm gets between 3.25% and 5% of the revenue of each smartphone sold under its licensing agreements with both Apple and Samsung.
Fundamental Numbers
Qualcomm has excellent fundamental numbers that should get the attention of potential dividend investors:
Qualcomm has increased its dividends each year since 2003, while the The 8 Rules of Dividend Investing look for stocks that have paid steady or increasing dividends for 25 or more years. Still, the company's fundamental numbers and valuation metrics are very impressive.
Must Read: 16 Rock-Solid Dividend Stocks With 50 Years of Increasing Dividends and Market-Beating Performance
Business Overview
Qualcomm generates roughly 70% of its revenue from licensing agreements from its strong wireless intellectual property portfolio. The remaining 30% of the company's revenues come from integrated circuit sales. The company's success in wireless has helped it grow to a market cap of over $110 billion.
Qualcomm is constantly innovating. The company's intellectual property portfolio has grown at a 32% compound growth rate since 1993. Qualcomm's innovation in wireless technology forms its strong competitive advantage. The company's innovation has not come by accident. Qualcomm spends over $5 billion a year on research and development. Few companies can match such a large research and development cash outlay every year. This gives Qualcomm deeper pockets to innovate than many of its competitors.
Shareholder-Friendly Management
Qualcomm has increased its dividend payments each year since 2003. This makes the company a member of the Dividend Achievers Index, which includes 238 stocks that have increased their dividend payments for 10 or more consecutive years.
The company recently announced that it plans to return $10 billion to shareholders in the form of share repurchases over the next year. At current prices, this is 8.8% of shares outstanding. At the same time, Qualcomm reaffirmed its goal of returning at least 75% of cash flows to share holders each and every year. At the same time as the $10 billion share repurchase announcement, Qualcomm also announced a healthy 14% dividend hike. The company continues to grow its dividend rapidly.
Trouble In China
Not everything is going smoothly at Qualcomm, however. The company recently incurred a fine of $975 million from the Chinese government. China alleged that Qualcomm was a monopoly, which was the cause of the fine. The real issue in China, from the perspective of the company and shareholders, however, is that Chinese manufacturers often under-report smartphone unit sales which results in lost revenue for Qualcomm. The Chinese government's imposed fine on Qualcomm suggests that China will back local companies, not Qualcomm, in legal disputes. Qualcomm will still benefit from growth in the Chinese smartphone market, but the company will receive less-than-agreed-upon revenue from licensing deals in the country.
Must Read: 5 of the Fastest Growing Dividend Stocks You Can't Afford to Miss
Growth Prospects
Management is projecting robust 15% earnings-per-share growth for Qualcomm. The company has a good chance to hit this targets.
First, the smartphone industry is expected to grow at nearly 10% a year over the next several years. Qualcomm should experience tailwinds from revenue growth in the overall smartphone industry. Secondly, the company is committed to massive share repurchases. Looking past the $10 billion share repurchase over the next 12 months, Qualcomm should repurchase somewhere between $5 billion and $8 billion a year in shares, which will reduce shares by between 4.4% and 7.1% a year. The combination of share repurchases and organic growth bodes very well for shareholders.
Aside from smart phone growth, Qualcomm has substantial growth prospects in the "internet of things" industry. Qualcomm is a leader in wireless technology. As a result, it should take part in the expected 17.5% a year growth of the "internet of things" industry.
Final Thoughts
Qualcomm appears significantly undervalued, given its strong growth prospects. The only drawbacks to the company are troubles in China and being in a fast-changing industry. The technology industry is subject to rapid change, which can quickly make a once strong business shrink rapidly -- see BlackBerry (BBRY). While this is not in the immediate future for Qualcomm, nobody can predict the technology of the next decade, let alone how it will impact a specific company.
With that said, Qualcomm should appeal to investors who are open to taking some risk for potential high returns while receiving current income through dividends at the same time. The company's strong expected growth and shareholder friendly management combined with a low price-to-earnings ratio are a rare investment opportunity.
Must Read: 16 Rock-Solid Dividend Stocks With 50 Years of Increasing Dividends and Market-Beating Performance
By Ben Reynolds
Fundamental Numbers
Qualcomm has excellent fundamental numbers that should get the attention of potential dividend investors:
- Price-to-earnings ratio of 14.5
- 10 year earnings-per-share compound growth rate of 17.2%
- Dividend yield of 2.45%
- Payout ratio of 33.5%
Qualcomm has increased its dividends each year since 2003, while the The 8 Rules of Dividend Investing look for stocks that have paid steady or increasing dividends for 25 or more years. Still, the company's fundamental numbers and valuation metrics are very impressive.
Must Read: 16 Rock-Solid Dividend Stocks With 50 Years of Increasing Dividends and Market-Beating Performance
Business Overview
Qualcomm is constantly innovating. The company's intellectual property portfolio has grown at a 32% compound growth rate since 1993. Qualcomm's innovation in wireless technology forms its strong competitive advantage. The company's innovation has not come by accident. Qualcomm spends over $5 billion a year on research and development. Few companies can match such a large research and development cash outlay every year. This gives Qualcomm deeper pockets to innovate than many of its competitors.
Shareholder-Friendly Management
Qualcomm has increased its dividend payments each year since 2003. This makes the company a member of the Dividend Achievers Index, which includes 238 stocks that have increased their dividend payments for 10 or more consecutive years.
The company recently announced that it plans to return $10 billion to shareholders in the form of share repurchases over the next year. At current prices, this is 8.8% of shares outstanding. At the same time, Qualcomm reaffirmed its goal of returning at least 75% of cash flows to share holders each and every year. At the same time as the $10 billion share repurchase announcement, Qualcomm also announced a healthy 14% dividend hike. The company continues to grow its dividend rapidly.
Trouble In China
Not everything is going smoothly at Qualcomm, however. The company recently incurred a fine of $975 million from the Chinese government. China alleged that Qualcomm was a monopoly, which was the cause of the fine. The real issue in China, from the perspective of the company and shareholders, however, is that Chinese manufacturers often under-report smartphone unit sales which results in lost revenue for Qualcomm. The Chinese government's imposed fine on Qualcomm suggests that China will back local companies, not Qualcomm, in legal disputes. Qualcomm will still benefit from growth in the Chinese smartphone market, but the company will receive less-than-agreed-upon revenue from licensing deals in the country.
Must Read: 5 of the Fastest Growing Dividend Stocks You Can't Afford to Miss
Growth Prospects
Management is projecting robust 15% earnings-per-share growth for Qualcomm. The company has a good chance to hit this targets.
First, the smartphone industry is expected to grow at nearly 10% a year over the next several years. Qualcomm should experience tailwinds from revenue growth in the overall smartphone industry. Secondly, the company is committed to massive share repurchases. Looking past the $10 billion share repurchase over the next 12 months, Qualcomm should repurchase somewhere between $5 billion and $8 billion a year in shares, which will reduce shares by between 4.4% and 7.1% a year. The combination of share repurchases and organic growth bodes very well for shareholders.
Aside from smart phone growth, Qualcomm has substantial growth prospects in the "internet of things" industry. Qualcomm is a leader in wireless technology. As a result, it should take part in the expected 17.5% a year growth of the "internet of things" industry.
Final Thoughts
Qualcomm appears significantly undervalued, given its strong growth prospects. The only drawbacks to the company are troubles in China and being in a fast-changing industry. The technology industry is subject to rapid change, which can quickly make a once strong business shrink rapidly -- see BlackBerry (BBRY). While this is not in the immediate future for Qualcomm, nobody can predict the technology of the next decade, let alone how it will impact a specific company.
With that said, Qualcomm should appeal to investors who are open to taking some risk for potential high returns while receiving current income through dividends at the same time. The company's strong expected growth and shareholder friendly management combined with a low price-to-earnings ratio are a rare investment opportunity.
Must Read: 16 Rock-Solid Dividend Stocks With 50 Years of Increasing Dividends and Market-Beating Performance
By Ben Reynolds
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