Tech Watch: Qualcomm's Returns Shouldn't Surprise

Qualcomm gives back.

Mar 4, 2014 at 7:00PM

Move along, folks -- nothing to see here. That was the market's attitude on Tuesday toward the situation in Ukraine, as U.S. stocks rebounded strongly from yesterday's losses. The benchmark S&P 500 index gained 1.5%, while the narrower Dow Jones Industrial Average (DJINDICES:^DJI) rose 1.4%. One large-capitalization stock that handily beat the broad market: Qualcomm (NASDAQ:QCOM). The leading mobile-chip manufacturer was speaking investors' language when it announced a 20% increase in its dividend and a $5 billion increase in its share repurchase program, but the announcement shouldn't have come as a surprise.

In the aftermath of the financial crisis, investors have found a new taste for income yield, and Qualcomm is no laggard in that area: Today's 20% dividend increase follows a 40% raise only a year ago.

Those generous increases aren't the result of pressure from an aggressive activist shareholder, either (not directly, although Qualcomm management will not have missed this trend in its sector). Contrary to many of its large-cap technology peers, Qualcomm has been paying a dividend since 2003; through its fiscal year 2013, the annual dividend had grown at a handsome annualized rate of 32%. Those dividends have made a powerful contribution to the stock's performance over the past decade, as the following 10-year chart demonstrates:

QCOM Total Return Price Chart

QCOM Total Return Price data by YCharts

Qualcomm's total return over the period (blue line) exceeds its price return (orange line) by roughly 40 percentage points -- and both have soundly beaten the total return on the S&P 500 (red line). The 10-year chart also provides some useful perspective to investors who complain that the stock has lagged major indexes in the current bull market, which began nearly five years ago.

Combine the dividends with share buybacks, and you have a cash return machine: In fiscal 2013, Qualcomm paid out an impressive 86% of its free cash flow through $2.1 billion in dividends and $4.6 billion of share repurchases. Last September, then-CEO Paul Jacobs vowed to return 75% of free cash flow to investors via dividends and share buybacks. His successor, Steve Mollenkopf -- who was formally installed during today's annual shareholder meeting -- didn't offer any updates or changes to those guidelines.

Does Qualcomm's capital allocation policy signal limited opportunities for growth and investment? There is little reason to think so; the straightforward explanation is that, like large-cap peers Cisco Systems or Apple, Qualcomm's operating cash flows dwarf its capital expenditures, whether they be for maintaining or, indeed, growing the business. This is the case now, as it has been for years.

Furthermore, although the growth rate in smartphone shipments has been slowing, Mollenkopf was upbeat with regard to Qualcomm's growth prospects (as CEOs are wont to be, admittedly):

A lot of people talk about the fact that everyone has a smartphone. That's true to some degree in some parts of the world, but the world is a big place and there are a lot more smartphones coming.

Qualcomm is ahead of the pack when it comes to mobile chips, but, in the technology sector, it's been ahead of the curve on capital allocation, too.

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Alex Dumortier, CFA, has no position in any stocks mentioned. The Motley Fool owns shares of Qualcomm. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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