Qualcomm: a dependable income source

Enthusiasts for patent litigation drama will be familiar with Qualcomm (US:QCOM). The semiconductor and telecommunications equipment specialist lost the latest round in its intellectual property war with Apple (US:AAPL) in March, after the International Trade Commission said that Apple had not violated a Qualcomm modem chip patent, ruling against the banning of the import of several iPhone models into the US. 

While Qualcomm’s disputes are worth monitoring, the stock remains a dependable income source. Earnings per share (EPS) growth will be flattered by a share buyback programme it implemented during the fourth quarter of 2018, as it looks to repurchase up to $30bn (£22.8bn) of outstanding common stock. The majority of this programme will be completed at the end of 2019. 

Analysts at JP Morgan expect a more steady pace of buybacks from 2020 onwards, at an annual rate of around $1bn. This, combined with around $3bn in expected dividends, should account for roughly 90 per cent of Qualcomm’s free cash flow.

This earnings growth will be welcomed by those concerned about Qualcomm’s current lack of dividend cover. Its dividend was covered by earnings for 2016 and 2017, until Qualcomm incurred a $3.32 loss per share in 2018. The group swung into a loss for the year after a one-off $5.2bn ‘toll charge’ was imposed under the 2017 Tax Cuts and Jobs Act, which repatriated deferred foreign income. Pre-tax income was significantly down anyway, falling to $513m from $3bn in the previous year. This decline was driven in part by pressures in licensing and royalty fees.

Cost reduction initiatives, which are expected to yield $1bn in savings in 2019, should add momentum to the group’s earnings growth. But the recent loss of chip shipments to Apple is expected to depress revenues in its core QCT business by 6 per cent, while JP Morgan reckons Qualcomm could be hit by a fine as big as $1bn over an antitrust case with the Federal Trade Commission.