Qualcomm (NASDAQ:QCOM) reported earnings for third-quarter down 13% in sales year-over year and off 34% in net income. Investors have sold off Qualcomm stock 14% from its April highs, but they are overlooking QCOM’s powerhouse cash flow generation.
Investors are concerned about the market’s transition from 4G mobile products to 5G. They worry that QCOM’s 5G chips will not win in the global transition to 5G that is now ramping up.
Qualcomm, however, said in a presentation that its design wins have now doubled over the past 3 months. Qualcomm admits consumers may hold off on buying a 4G device in favor waiting for 5G devices, but the company is well-positioned for the early 2020 calendar ramp-up in 5G carrier system integrations.
QCOM also provided guidance for its fiscal Q4 ending September for between 65 cents and 75 cents on a non-GAAP basis. This is slightly below the recently reported June numbers of 80 cents per share. That is important because it essentially implies that QCOM’s cash flow generation is not going to dramatically fall.
QCOM’s Free Cash Flow and Valuation
In fact, Qualcomm’s free cash flow (FCF) is very strong. QCOM produced $6.1 billion in cash flow from operations for the 9 months ending June 30. QCOM should generate between $7.5 and $8 billion for the year through September. With just $800 million or so in capex, free cash flow (FCF) should be — at least — $7 billion.
That means its QCOM’s $94 billion valuation is not that expensive. Its $7 billion gives it a FCF yield of 7.5%. That’s a very high yield compared to Big Tech firms, such as Amazon (NASDAQ:AMZN), which sports a paltry 2.5% FCF yield. Better still, Qualcomm’s FCF is driven by a large patent portfolio of technology and patent licenses. This makes for steady, recurring earnings.
QCOM’s Buybacks and Dividends Are Well Covered
Qualcomm’s balance sheet is also in great shape. It has over $14.4 billion in cash and securities and only $16.4 billion in long-term debt. This is after having spent over $1 billion in share buybacks as a form of shareholder return on capital in the past 9 months.
Qualcomm is proud of pointing out in its presentation that it has returned more than $88 billion to shareholders in its history through both dividends and share buybacks. Theres’ still another $7.8 billion left on its current share buyback plan, which means more value for stock holders. Assuming Qualcomm buys back $1.3 billion in shares this year, that means its buyback yield is about 1.4% of its $94 billion market value. You can expect QCOM will continue to buy back shares under this program each quarter. This is a way of both increasing the share price and also increasing dividends per share to remaining investors for a given amount of dividends paid out.
For example, Qualcomm’s stock has an attractive dividend yield of 3.48% at its present annual dividend rate of $2.48 per share. This dividend costs only about $3 billion per year, and is easily covered by the $7 billion in free cash flow that is produces each year.
As the share count falls from buybacks each year, the $3 billion in dividends paid will increase on a dividends paid per share basis. So combining the dividend yield of 3.5% and the buyback yield of 1.4%, QCOM stock sports a total yield of 4.9% for shareholders. This is a very attractive return for investors.
Bottom Line on QCOM Stock
Going forward expect QCOM stock to continue to show steady free cash flow. Qualcomm has indicated that its first quarter of 2020 (quarter ending December 2019) will show similar growth in sales and earnings as its Q4 guidance. After that, expect QCOM to begin producing results based on increasing market share in the 5G marketplace.
With its 4.9% total yield, including buyback and dividend yields, Qualcomm stock is quite attractive. The patient investor, who is willing to ride the stock for its potential 5G growth next year, should take advantage of the dip QCOM stock has had from its peak price in April.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities.