Over the past year, Qualcomm (QCOM 0.82%) stock has faced quite a bit of downward pressure. Some investors have suggested that the company should spin off its chip-licensing business. Meanwhile, lawsuits and investigations have popped up in China and, more recently, the European Union.
Those factors, along with the potential for increased competition to force chip prices down, have caused the share price to drop some 20% in the past 52 weeks.
Qualcomm has started working on some of these challenges. In the meantime, it remains the leader in the mobile chipmaking industry, powering a majority of smartphones and tablets. It also appears to be the clear-cut winner as the "Internet of Things" movement pushes more of our possessions toward digital connectivity.
Qualcomm thus has a strong and well-entrenched business. With that in mind, I'm turning my attention toward Qualcomm's dividend and whether it can drive future stock growth.
Qualcomm's dividend and earnings
Qualcomm pays an annual dividend of $1.92, which puts its current annual yield at about 3%. That's pretty respectable, especially for a technology company, and it makes Qualcomm a viable option for investors seeking cash flow.
The company has grown its dividend by an average of almost 18.5% annually over the past five years, and it's increased its payout for 13 years straight. That's a testament to Qualcomm's growth, which is also reflected in its annualized earnings-per-share growth of almost 13% over the past five years.
With such a solid track record, is it fair to expect a similar dividend growth rate for the next five years? If not, what's a more realistic expectation? And can dividend growth help pull Qualcomm stock out of its current rut?
Dividend sustainability and growth potential
Let's take a closer look at the company's dividend. As already stated, Qualcomm notched average EPS growth of 13% over the last five year period, and dividend growth was 18.5% over the same time frame. Dividend increases have been outpacing earnings growth; this is obviously not a sustainable long-term policy. Future dividend increases will eventually taper off and dip below earnings growth. For the short-term, though, does the company have room to continue to grow the dividend aggressively?
Over the last twelve months, Qualcomm has been paying out about 40% of earnings to shareholders in the form of dividends. This means there is room for growth in its payout ratio, which also has the potential to boost its share price going forward. That being said, Qualcomm is projecting a drop in earnings of about 29-34% this year. At least over the short-term, it appears that the company payout is stable, but increases are likely to slow substantially.
Other possible drivers of future growth
Qualcomm's business model runs on the design and sale of chips that power smartphones, especially the licensing of such designs to other chipmakers around the globe. As a result, the company has cornered the market on smartphones. It can either sell its own products to be used in a given device or earn licensing fees from a rival chipset used to power it. This is the model that has come under scrutiny in China recently, causing investor angst about growth prospects.
Another arm of Qualcomm's business, though, supports and invests in the development of new products and systems. The company has stated its intention to design chips powering wearable devices, such as smart watches, and other wirelessly connected products. With its wireless business already set up, Qualcomm is poised to benefit as the "Internet of Things" movement continues to gain momentum.
Strong balance sheet
In addition to developing business trends, consider a few liquidity metrics for Qualcomm:
| Metric |
Qualcomm |
Industry |
|---|---|---|
|
Quick ratio |
3.1 |
1.6 |
|
Total debt-to-equity ratio |
2.9 |
45.7 |
Source: Reuters
The quick ratio measures short-term solvency, and a higher number signifies a higher amount of assets. With the total debt-to-equity ratio, a higher number signifies a larger amount of debt, which can cap future growth potential.
Qualcomm's quick ratio and total debt-to-equity ratio both support the argument that the company has a strong balance sheet and could therefore execute both short-term and longer-term growth strategies with the assets at its disposal. I believe that recent "noise" coming out of China and other issues the company is facing will be short-lived, and Qualcomm will return to growth over time.
Dividend growth is likely to account for more shareholder value at Qualcomm in the future than it has in the past. This is a transformation many companies make after a strong period of extended growth.
Already boasting a well-entrenched business and a dominant role in its industry, I believe Qualcomm will slowly make the switch from a growth company to one that is focused on returning value to shareholders through dividend increases and share buybacks. The company is well-positioned to do so going forward, and is dedicated to developing new products that fit the mold of consumer demand in our increasingly mobile world.
