This Semiconductor Dividend Stock Changes EVERYTHING
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QCOM stock is a rarity in the investing world. It’s a tech dividend stock. Typically, those two words don’t go together. That’s because most technology stocks reinvest their profits back into the business to fuel strong growth. However, Qualcomm stock is proving they can do both. They’re investing in exciting technology themes like autonomous vehicles and the Internet of Things, but they’ve also managed to increase their dividend for over 20 years in a row. Is Qualcomm the best undervalued dividend stock to buy now? Let’s find out.
People love to invest in exciting stocks. Coincidentally, these are always the stocks everyone else is talking about. It’s why fund managers invest in combinations and permutations of the same set of names. Well, I’m going to tell you something very profound. No, it’s not today’s news about how a bleary-eyed Kate Hudson got smashed and her fiance was pissed off about it.
It’s simply this – real money. Kate Hudson-type wealth comes from the stocks that nobody’s talking about. Today, we’re going to talk about a tech stock that gets treated the same as Kate Hudson’s future ex-husband. It’s occasionally mentioned in the shadow of much larger stories but it’s on the cusp of getting a lot more attention. Now before we start naming names, let’s talk tech dividend stocks.
Technology Dividend Stocks
So for all of you non-Americans watching, that’s about 50% of our audience, this gentleman here is a famous American philosopher named George Carlin. And he liked to point out oxymorons.
One of the more interesting ones is the term near miss. So if two planes have a near miss, that means they nearly missed, they should have hit. But we use that incorrectly so it’s an oxymoron. He lists off a number of other ones here like military intelligence or accurate horoscope. But the one oxymoron we’ve added here that we come across a lot is tech dividend stock. Now why is that an oxymoron?
Well, that’s because mature businesses generate cash consistently over time and they need to determine what to do with that cash. What’s the best use of that cash for shareholders? Well, if you’re a growth firm, typically, the best use is to reinvest that back into the business and continue fueling your growth. So the shareholders are getting a better ROI by having you keep that cash rather than handing it back to them. So you might use that cash for Capex for organic growth or for M&A activities.
So since growth companies can show a very strong return on investment for cash, they don’t typically give it back to shareholders and when they start doing that it signals a transition from growth to value. However, you always need to put the amount of the dividend in context. For example, NVIDIA pays a dividend but it’s less than half a percent of their total profit. So relatively insignificant from that perspective.
Now if you look at tech firms like IBM versus Microsoft, you get two different stories here. So when a tech company transitions to value, as IBM has done, they stop competing as effectively against their competitors because they’re not taking that cash and using it to either protect their market share or, ideally, grow their market share and, when this happens, they start getting eaten alive by competitors.
So, eventually, what happens is they can’t continue paying a dividend and they need to take the money and use it to resurrect their business. IBM’s a good example of a tech dividend stock that seems to really be a jack of all trades. They’re constantly trying to reinvent themselves in half a dozen different ways.
An Upcoming Dividend Champion
But then when you look at Microsoft, and they’re actually on the cusp of becoming an upcoming dividend champion, that means they’ve not only paid but increased their dividend for at least 20 years in a row. A champion has done that for 25 years in a row or more. Microsoft’s really a man-bites-dog story because tech firms that typically start paying lots of dividends are signaling to the market that they’re all out of the growth story, whatever that might be. Now you understand why we need to be very careful when we’re examining tech dividend stocks like Qualcomm. That’s the firm that we’re going to talk about today.
Now if you want to find a list of tech dividend stocks, what you can do is simply look for all champions and upcoming champions and you can easily do that using our Quantigence Q-score calculator available to premium subscribers.
So all we’ve done here is selected all, so we’re including our core set, small caps, international dividend champions, and also upcoming champions, as I said, firms that have increased a dividend for at least 20 years in a row. We filter on the technology sector and we get a list of names. Now each of these are ranked according to a Q-score, I’m not going to get into how that’s calculated, it’s a transparent methodology that we use to rank dividend growth stocks.
Well, Qualcomm rises to the top here with a very respectable Q-score of 18.4 and they’ve not only been paying dividends but increasing them for 21 years. That’s quite notable. And what Buffett calls firms like this, he calls them equity bonds.
Essentially, you have an equity but you’re also getting an income stream from that and, unlike bonds, it’s not fixed income, it grows. As I said, this income stream for Qualcomm has been growing for 21 years in a row. And you can see the average growth rates here across various time frames.
So over the past 10 years, it’s grown on average about 8%. Now people will be quick to say, “But Joe the dividend’s only 2.24%.” Don’t pay so much attention to yield. This dividend is growing by 8% a year which means that yield will be growing over time as well, what’s referred to as, yield on cost.
What Does Qualcomm Do?
But let’s set aside this equity bond feature and really look at whether Qualcomm stands on its own as a good tech stock to invest in. So the first thing we want to do is look at what they actually do. And this slide here shows that there are two segments of the business, to start with. So we have QCT, that’s Qualcomm CDMA technologies and then you have Qualcomm technology licensing, a much more friendly name there. And there’s also a third segment called QSI, that’s largely immaterial. But when you look at these two segments, you start off by seeing that QCT dominates with 86% of 2024 revenues coming from that segment, 14% obviously coming from the other segment.
But what’s interesting then is to look at, well, what percentage of profits and they’re referring to earnings here. EBT – Earnings Before Taxes. Don’t worry too much about that. Let’s use that as a proxy for profitability. Which segment is more profitable? Well, clearly the licensing segment is, as it represents 30% of all 2024 profits while QCT represents 70%. So when we look at the trend, the quarterly revenue trend, for each of these segments, we see a nice upwards trend for QCT, what’s called here, Equipment and Services.
And then for licensing, we see this sort of lagging downwards trend or perhaps a stable trend. There’s a little bit of a spike there, you’d have to look into what that was, perhaps a milestone payment or something like that. But what’s happening is that QCT is becoming increasingly more weighted over time. So we want to focus on what the QCT segment looks like.
As for licensing, we noted some customer concentration risk in 2024, around 53% of their revenues came from three customers. So we can break QCT revenue streams down into three buckets. What they call Handsets, Automotive, and IoT. Here you can see last year’s, so fiscal year 2024, the revenue growth for each bucket.
They’re noting record Auto revenues and, of course, very strong growth there. But when we consider where revenues come from, 75% come from Handsets or Mobile, just 9% come from automotive. So we would be interested in seeing them diversify this more and that’s what the company’s trying to do. So they’re focused on growing Automotive and IoT. When you look at their recent strategy presentation, there’s a couple interesting tidbits to take from here.
So first is this comment about their Android revenues and how they’ve restored performance leadership in Android. So Mobile’s a fairly mature market. Based on cursory research, it shows Qualcomm is in second place, according to market share with Media Tek in first place. 75% of QCT revenues come from mobile. Now when it comes to Auto, we’re interested in the Autonomy opportunity.
And they claim on that slide that their design wins the $45 billion in automotive design win pipeline they’re talking about. A third of that comes from Autonomy. Then IoT, of course, is of interest but the question is why is it declining? IoT also sometimes becomes a catch-all bucket for companies. So the next step might be to better understand their IoT segment.
Qualcomm Rapidly Growing Automotive Segment
And this slide is of interest relating to Automotive. Remember we talked about Autonomy. Well, it’s interesting to note how they refer to the digital cockpit ramp that’s happening now and you know you talk about one-third being Autonomy.
The other two-thirds is this idea that vehicles are becoming increasingly software-driven. But we don’t really find too much appeal to the idea of having a rich internal cockpit for a vehicle. It’s kind of a nice to have. Autonomy has a lot more opportunity associated with it. And if they hit this, what, $8 billion, by fiscal 2029, revenue target they have for automotive, if the other segments stayed the same then automotive would move from 9% of total revenues to 24%, let’s say, of total QCT revenues. That would be pretty impressive if they’re able to pull that off.
Qualcomm’s Other Segments
Now getting back to IoT and the definition you see here, they talk about different segments – PC, VR, and Augmented Reality which has largely been a nothing sandwich for investors so far. Industrial, that’s interesting, Networking and other Personal Computing Devices, perhaps, mature markets there.
Further understanding where IoT revenues are coming from in these various buckets will probably be difficult to do because the company doesn’t provide that sort of information aside from various comments they might make in earnings calls and you kind of have to deduce that. But for investors in Qualcomm, when they have their quarterly decks, pay attention to these two numbers.
So the first would be their combined Automotive and IoT revenues, the relevance of this metric is this is non-mobile, right?
So they’re trying to increase this overall number. And they seem to consistently point to automotive growth so they expect that to be a big driver of growth for the business going forward.
Is Buying Back Shares a Good Idea?
So in the process of putting this presentation together, I came across something very interesting that I wanted to share with you and it starts with this idea of buying back shares.
So in 2021, they announced this $10 billion share repurchase program. By September of last year, they only had a billion remaining and then just a month after that, they announced a new $15 billion stock repurchase program. So the thing to note about share buybacks is that when you’re decreasing the amount of shares and you’re paying the same amount in dividends, the dividends per share will increase because your share of the pie is becoming bigger. So when I started to do some simple math to look at the impact of buybacks on their dividend growth, I didn’t see much of an impact at all and that made me quite curious. So here we see something very interesting.
The net impact of those repurchases was very minimal because they issued shares from fiscal 2023. They had 1.114 billion shares outstanding, they issued 24 million shares, and they repurchased 25 million.
So why did they do that? Well, I started out by asking Perplexity. So here we can see just how useful these LLMs are for research and Perplexity said they issued these 24 million shares for the acquisition of Autotox.
And if you didn’t validate that, it sounds about right. But we took a quick look and that acquisition actually fell through. So I told Perplexity, “Well, that acquisition fell through.” And it said, yeah I guess it did, sorry about that.” That’s not very useful. So I asked Grok and it did a much better job of analyzing the situation.
The analysis was very rich but it needed to be prodded in several cases but, ultimately, it helped me find the answer quite quickly which relates to RSU’s vested and it even pointed me to, well, it didn’t point me to the correct page but I quickly found it, the Restricted Stock Units. So these are share awards that come with certain conditions for employees, usually, there’s a vesting period before they get transferred. And what we see here is rather interesting. So Qualcomm gave out to employees 25 million shares at $124.45 a share and then they went and repurchased roughly 25 million shares at $164 a share.
So one wonders if they shouldn’t even be buying back shares. But the effect of them buying shares over the years really hasn’t had a minimal effect on the shares outstanding. So it just questions why they’d have that policy in the first place. Now I’m just someone sitting here in his underwear in a Dubai hotel commenting on what a $178 billion firm is doing but I thought that was an interesting observation to make.
Qualcomm Stock Valuation
Now when it comes to share price performance, you see this blank slide represents just about all the work that we’ve put into looking at share price because we don’t really care much about that at all. We invest in companies, not stocks. So when it comes to evaluating whether or not a firm is expensive or not, we don’t use arbitrary round share price numbers like the fintwats do. We simply use valuation measures. So here I’ve provided three of them.
We have our Simple Valuation Ratio. This is market cap divided by annualized revenues. That comes in at around 4. Compare that to our catalog average of about 6.8. So it’s undervalued in that respect. And then when we look at Price-to-Earnings ratio, it’s also undervalued, a P/E of 17. And then when we do a forward P/E ratio, it’s even more undervalued at 14. So you can compare both those P/E numbers to semis in the 50s right now and overall stocks in the 30s. So why would you think Qualcomm’s undervalued or is it even undervalued? Typically, this reflects the expectations that investors have for future growth of earnings per share.
Is QCOM a Buy Now?
Now when it comes to investing in Qualcomm, we only invest in Dividend Champions, so we’d wait for another four years. You don’t have to. But overall, this looks like an appealing investment for a dividend growth portfolio.
We love these, what we call, two-birds-with-one-stone Champion. So an example would be Caterpillar for connected equipment or NextEra Energy for renewable energy, and, in this case, Qualcomm for diversified semis. So this makes one wonder if, in the future, we’re going to see more tech dividend stocks that are able to manage their growth and value concurrently. We’ll see if Qualcomm’s able to do that.
But if you’re interested in this whole tech dividend stock thesis and some interesting names, one that we’ve invested in actually, you’ll want to watch this piece on the best tech dividend stocks out there next. Thanks so much for taking the time to watch this today.
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