Wireless-chip giant Qualcomm Inc. (Nasdaq: QCOM), recommended in a Private Briefing special report last April 2, said it will boost its quarterly cash dividend by 40%. The company also unveiled a $5 billion stock buyback plan.
The San Diego-based Qualcomm, the world's leading supplier of semiconductors for cellphones, was featured in the Private Briefing special investment report "The Wireless Spending Boom."
It's a stock that we continue to like a lot – and we're no longer alone.
Even before the increase, analysts rated Qualcomm's shares as a "Buy," with a consensus one-year target price of $75.05 – which is 10% higher than where the stock is trading right now.
That may not sound like much, but a double-digit gain on a big-cap stock with the market in record territory is nothing to eschew.
And, again, that's a near-term target.
Long-term, the potential is even greater – especially after you factor in this dividend increase.
The 40% dividend hike boosts the quarterly payout (after the already-declared March 27 payout) from 25 cents a share to 35 cents – giving the stock a 2% dividend yield for one of the first times I can recall. (Right now, the stock is yielding about 1.47%).
That implies a higher stock price for Qualcomm. For Qualcomm shares to have the same dividend yield with a $1.40 annual payout as they do with the current $1 payout, the stock would have to advance from the current $68 to $95 – a 40% gain.
Obviously, there's a lot more than just the dividend that determines the stock price. There are earnings, for example. And growth projections (known as "guidance," in Wall Street parlance).
But what my example shows is that there's more upside potential here than most investors realize.
Back on Jan. 30, for instance, Qualcomm boosted its financial targets for the year. And analysts believe the company intentionally understated its expectations – employing caution because of the uncertain economy and the budgetary mess in Washington.
Qualcomm also continues to benefit from the global demand for smartphones. And, just as we predicted in our research report, the chipmaker is benefitting from a massive carrier shift to the high-speed wireless technology known as "long-term evolution," or LTE, where Qualcomm has a big competitive advantage. That's especially true where carriers are making the move to 4G LTE – technology that industry insiders refer to as "4G Lite."
"That trend is continuing to work in Qualcomm's favor. They're the only viable option for LTE right now," MKM Partners analyst Daniel Berenbaum told Reuters recently. Qualcomm is enjoying "a very strong quarter and the guidance is very strong."
Qualcomm gets revenue from chip sales. It also gets royalty payments from phone-makers that have technology license agreements with the company.
Longer term, the company expects to grow its earnings at a rate of 15% a year for the next five years – promising the kind of visibility that's all too rare these days.
That visibility extends to dividend increases, which Qualcomm has done on a consistent basis. Expect that to continue as well. The current payout ratio is about 35%, which means there's a lot of room for future increases.
In fact, one analyst said that before yesterday's big increase was announced, the company's five-year dividend growth rate was 12% (it jumps to 17% with yesterday's announcement).
If you assume that the more-conservative 12% rate continues for the next five years, Qualcomm's dividend would reach $2.47 by 2018. At that payout level, a 1.5% dividend yield would imply a stock price of $167.96 – 147% above the current price. (Again, I'm using this to give you some perspective, not necessarily as a prediction.)
The bottom line: There's a much-heftier return available than the 10% gain that Wall Street is right now looking for.
The stock isn't all that pricey by some of the usual metrics. Because it sells premium products, as we noted above, its profit margin is 28% – compared with 17% for the overall industry. Qualcomm's shares are trading at about 13.5 times earnings – again, below the peer average of 17.
You can see why we picked this stock back in April … and why we see a nice upside for investors over the next few years.
We'll keep you posted.
And we'll see you tomorrow.
[Editor's Note: Unless otherwise specified, we recommend investors employ a 25% "trailing stop" on all holdings.]