The thing is, most of Qualcomm’s cash and equivalents of $32.4 billion are lying idle in foreign countries. It has just $2.8 billion cash lying in the U.S while the remaining $29.6 billion is deposited in foreign countries. Now, Qualcomm can’t bring this foreign cash back in the U.S as it would attract something called double taxation. So $29.6 billion, or 91.3%, of Qualcomm’s entire cash balance can’t be used to pay dividends or fund stock buybacks which basically means that the bulk of its cash balance is lying idle in foreign countries, yielding a low interest income at best.
“Our cash, cash equivalents and marketable securities at September 25, 2016 consisted of $2.8 billion held by United States-based entities and $29.6 billion held by foreign entities. Most of our cash, cash equivalents and marketable securities held by foreign entities are indefinitely reinvested and would be subject to material tax effects if repatriated. However, we believe that our United States sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.” – FY16 Annual Report (2)
The NXP buyout takes care of this repatriation problem. Notice the words “cash held by foreign entities” in the following statement.
“We intend to fund the [NXP buyout] transaction with cash held by foreign entities, which will result in the use of a substantial portion of our cash, cash equivalents and marketable securities, and new debt.”— FY16 Annual Report (2)
QUALCOMM, Inc. (NASDAQ:QCOM) has explicitly stated that it would fund the NXP buyout using its cash lying in foreign countries. So the chipmaker is basically putting its idle cash to good use. Instead of earning low interest rates, or negative rates in some countries, the cash would now open up a new revenue stream for the chipmaker. So it’s a win-win for everyone.
The decision to tap foreign bank balance also means that Qualcomm won’t be touching its U.S-based cash and equivalents to fund the buyout (unless its financial position deteriorates drastically in the next few quarters) so the company’s dividend paying capability shouldn’t be affected. After all, it’s the domestic cash and free cash flows that are being used to fund dividends and stock buybacks at the end of the day.
Putting It All Together
QUALCOMM, Inc. (NASDAQ:QCOM) is only putting its idle cash to use which should boost its performance metrics such as ROCE, ROI, ROE and so on. Beyond that, there will be cost synergies, incremental revenues and slashing of overlapping jobs post NXP buyout, that would further strengthen Qualcomm’s financial position and dividend-paying capability. So if you were worried that the NXP buyout would strain Qualcomm’s dividends, then don’t be. Qualcomm’s dividends are sustainable and safe.
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The article Are Qualcomm Inc (QCOM) Dividends Safe Post The NXP Buyout? originally appeared on amigobulls.com. Watch our analysis video on QCOM
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