QUALCOMM, Inc. (NASDAQ:QCOM) has metrics that make many dividend investors salivate.
The company offers a 3.4% yield, has increased its dividend every year since 2003, and has recorded annual dividend growth in excess of 20% over the last five years.
Furthermore, Qualcomm’s stock is down roughly 25% from its 2014 highs and trades around 16.5x 2016 estimated earnings.
These are the types of characteristics we like to see for investments in our Top 20 Dividend Stocks portfolio.
However, with technology trends changing more rapidly and becoming harder to identify, should Qualcomm make the cut?
Business Analysis
Qualcomm is a leader in the development and commercialization of digital communication technologies called CDMA (Code Division Multiple Access) and OFDMA (Orthogonal Frequency Division Multiple Access), including LTE (Long Term Evolution).
They own significant intellectual property applicable to products that implement any version of CDMA and OFDMA, including patents, patent applications and trade secrets.
Any companies in the mobile communications industry trying to develop, manufacture, and/or sell products using CDMA and/or LTE standards requires a patent license from Qualcomm.
They also develop other technologies used in handsets and tablets including certain audio and video technologies, advanced WLAN functionality, and memory controllers.
In addition to the licensing areas of their intellectual property portfolio, they design and manufacture products and services based on CDMA, OFDMA, and other digital communications technologies.
Their products mainly consist of chips and system software used in mobile devices and in wireless networks. To a lesser extent they sell integrated circuits for use in broadband gateway equipment, desktop computers, and streaming media players.
The main factor that drives the company’s performance is cell phone penetration, particularly with smartphones.
According to World Cellular Information Service (WCIS), the less than 60 million global mobile connections in 1994 grew to approximately 7.2 billion in September 2015.
One of the other key drivers of growth within mobile is the continued global penetration of 3G/4G technology (CDMA-based, OFDMA- based and CDMA/OFDMA multimode).
In September 2015, this represented 3.4 billion connections, or nearly 47% of total mobile connections, and by 2019 it is projected to reach 5.8 billion.
It is clear that global smartphone penetration continues to grow at a rapid pace. According to Gartner, in 2014 more than 1.2 billion smartphones were shipped and it is projected to increase rapidly with cumulative shipments of smartphones projected to be over 8.5 billion from 2015-2019.
Overall, Qualcomm is primed to ride some secular growth trends for years to come.
Qualcomm operates the business through two main reporting segments: QCT (Qualcomm CDMA Technologies; 68% of revenue) and QLT (Qualcomm Technology Licensing; 32% of revenue).
The QCT segment develops and supplies integrated circuits and system software based on CDMA, OFDMA, and some other technologies for use in voice and data communications along with other technology applications.
The integrated circuits are sold and the software licensed to manufacturers that use their technology in wireless devices (mobile phones, tablets, laptops, etc).
The QTL segment grants licenses to use portions of their intellectual property which includes patents in the manufacturing of wireless products implementing CDMA and LTE standards.
Their licensees manufacture mobile devices, tablets, and laptops along with a whole host of other machine-to-machine devices. The revenue generated in this segment comes mainly from license fees and royalties based on sales by the licensees.
The QTL segment is extremely important for the overall business even though it only contributes about a third of the overall company’s revenue. This is because the licensing business generates extraordinary high margins.
At the segment level, QTL reported a pretax margin of nearly 87% in 2015, which towers over the QCT segment’s pretax margin of about 14% in 2015.
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