Qualcomm Inc.’s (QCOM, Financial) steady downward slide since 2014 has pushed the dividend yield above 4%. The stock price has declined nearly 17% in the last 12 months, and if the company's revenue declines further, the yield will keep moving up. But how safe is the bond-like dividend yield, and should investors be chasing the stock or should they wait before jumping in?
The stock has been moving lower and lower because Qualcomm’s revenue has been declining. Revenue peaked in 2014 at $26.487 billion before declining to $23.554 billion. The slowdown has continued unabated this year as revenue declined by nearly 6% in the first nine months of the current fiscal.
Qualcomm is the largest mobile chipmaker in the world, so it is surprising to see revenues declining year after year as smartphone sales around the world continue to grow at a decent pace. One of the company's main problems is it is losing market share to competitors like MediaTek Inc. (TPE:2454, Financial).
The company also generates revenue by licensing its patents for wireless technologies, but its recent fight with Apple Inc. (AAPL, Financial) over its licensing practices has put that segment’s future under a cloud of doubt.
During the third-quarter earnings call, the company said:
“In QTL, third-quarter results and fourth fiscal quarter guidance reflect the impact of our dispute with Apple and the licensee dispute that we disclosed last quarter. Despite the near-term financial impact to our business by the actions of a small number of powerful industry players, the long-term outlook for our licensing business continues to remain strong.“
With both sides of the business under pressure, revenue growth is going to remain elusive in the short term. In addition, these effects could spill over to the medium to long term because no one really knows which way the lawsuits will go and how much of a negative financial impact they will have, if any. This uncertainty, coupled with steadily declining revenue, has caused the stock price to move lower, pushing yields higher.
Qualcomm is sitting on a boatload of cash. At the end of second quarter, the company had $19.4 billion in long-term debt, $14.9 billion in cash and another $16.889 billion invested in securities. The surplus cash position does make its dividend safe in the medium term, despite the payout ratio surpassing 100% in the first nine months of the current fiscal year.
Even though the dividends appears to be safe due to the cash cushion, dividend growth will be hard to come by as revenue continues to decline. The current risks far outweigh the returns, so investors should wait for normalcy to return before jumping in.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
