A Stock With 4.3% Yield Now and Big Gains Ahead? I’ll Take It

A scribe at Barron’s argued it’s a binary event: Qualcomm shares could go to $40 or to $80.
I’m sure the scribe called it “binary” for effect. Of course, the possible combinations extend far beyond $40 and $80. A Qualcomm (NASDAQ: QCOM) investment is hardly analogous to the flip of a fair coin.
That aside, if the event were binary, I’d bet on $80. And that’s how I’d invest.
Qualcomm shares are down 18.5% year to date. The cause  ̶  centered on royalty payments  ̶ is well documented. Indulge me as I add my own documentation.
Qualcomm’s problems began early in the year when an arbitrator forced the company to pay BlackBerry (NASDAQ: BBBY) $940 million. BlackBerry thought it paid too much to Qualcomm in royalties in past years. The arbitrator sided with BlackBerry. Case closed.
BlackBerry is a pocket-change payment in the grand scheme of Qualcomm’s problems. Apple (NASDAQ: AAPL) is a different story. With Apple, we’re talking possible bank withdraws.

Royalty Problems

Apple is one of Qualcomm’s two largest customers. (Samsung is the other.) Apple has blocked royalty payments that previously flowed to Qualcomm for iPhone sales. Apple believes that Qualcomm’s royalty extractions are excessive. Qualcomm, in turn, believes otherwise. Qualcomm sued Apple for breach of contract.
Qualcomm has lost the initial royalty battle with Apple. Apple continues to withhold royalty payments.
Qualcomm will eventually win the war.
Qualcomm’s royalty demands hardly appear excessive compared to the value of its technology. While a top-tier iPhone 7 sells for $700, Qualcomm’s per-phone royalty fees are less than what Apple charges for a wall plug, approximately $19.
Wall Street analysts worry themselves awake, nonetheless. They worry that other smartphone manufacturers will follow Apple’s lead and cease paying Qualcomm for its intellectual property.
I’m more sanguine on the royalty-payment matter than most analysts. Despite its legal battle with Apple, Qualcomm will continue to supply chips and technology used in iPhones and iPads. Apple has no reasonable alternative, which means it has no alternative than to eventually pay Qualcomm’s for its chips and technology.

Qualcomm Shares Are Cheap

The imbroglio with Apple is an immediate drag. Specifically, it’s a drag on Qualcomm’s revenue and earnings.
Qualcomm forecasts fourth-quarter (next quarter) revenue of $5.4 billion to $6.2 billion. It forecasts EPS of $0.55 to $0.65. A year ago, Qualcomm booked $6.2 billion in revenue and earnings of $1.07 a share.
The outlook is cloudy if we look only to the tip of our nose, but look to the horizon and  blue skies appear. Although Qualcomm faces immediate problems, its long-term outlook is mostly sunshine.
In the mobile segment, Qualcomm’s CDMA technologies (QCT) business grows in the competitive China market. The company’s QCT operating segment generated approximately $4 billion in revenue in the third quarter, a 5% year-over-year increase.
At the same time, Qualcomm ambitiously exploits its advantage in other key growth markets, such as 5G wireless services, ARM-based servers, and deep learning. Revenue generated from these segments rose nearly 30% year over year.
Beyond smartphones, we find the $47-billion acquisition of NXP Semiconductors (NASDAQ: NXPI). NXP is one of the world’s largest developers of chips for automobiles.
Qualcomm is betting big on cars becoming the next smartphone. Peruse the technology embedded in any new car, and it’s a smart bet. NXP’s revenue increased 56% to $9.5 billion last year. NXP is a smart bet to exploit an inevitable trend.
Qualcomm’s high-yield dividend is another smart bet.
Qualcomm has increased its dividend annually since 2003. The latest increase lifted the quarterly payment 10.4% to $0.57 per share. The dividend will continue to grow annually, and likely at a double-digit rate.
Qualcomm generates cash to an extent few companies can emulate. Despite Apple withholding royalty payments, Qualcomm ended the latest quarter with $38.7 billion in cash and marketable securities – up from $31 billion a year ago.
Once the legal imbroglio with Apple subsides, you can be sure the drag on revenue and earnings growth will loosen. An immediate 50% increase in reported EPS is attainable once Apple returns to paying the royalties it rightly owes Qualcomm.
Yeah, I’ll take $80 a share, with a 4.3% dividend yield to hold me over.

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