Shares of chipmaking gaint Qualcomm (QCOM, Financial) retracted considerably last year. But Qualcomm has staged an impressive recovery this year, and the stock is in uptrend. Although Qualcomm has appreciated considerably from its 52-week low levels, the stock is still a buy and here's why.
Strong dividend
Qualcomm was badly hurt in the previous year mainly due to the removal of the Snapdragon 810 processor from Samsung’s (XKRX:005930, Financial) flagship phones S6/S6 Edge. But this year, the company has successfully regained its position in Samsung’s Galaxy S7/S7 Edge, which is powered by its Snapdragon 820 processor (some regions). The company solved all the problems such as overheating that were found in the Snapdragon 810 processor.
The chipmaker has fended off competition from Intel (INTC, Financial) in the smartphone market but presently faces some problems. Revenue generated from Qualcomm’s chip manufacturing business, which accounts for a major part of the company’s overall revenue, is losing market share in smartphone chips to trivial opponents such as Media TeK. Moreover, giant companies like Apple (AAPL, Financial) and Samsung are strategizing to use their own manufactured chips in their upcoming smartphones.
Apart from this, the company’s licensing business has been beleaguered by companies and government regulators, appealing that its cut in the range of 3% to 5% of the wholesale price of each smartphone sold around the globe is too high.
On the other hand, Qualcomm anticipates that entering into the new market segments such as Internet of things, cars, drones and data centers will help the company overcome the losses and reap profits. The company currently pays a forward yield of 3.9% and has surged its dividend yearly for the last 13 years, which turns Qualcomm into a much more trustworthy dividend growth stock.
ZenFone 3 is powered by Snapdragon 820
ASUSTek is about to launch its new smartphone titled ZenFone 3, which will have a completely aluminum body compared to the cheap plastic body of ZenFone 2. Due to this, ZenFone 3 will be considered a high-end smartphone. However, Qualcomm has huge benefits from ASUSTek’s decision to sell superior quality smartphones as the company’s Snapdragon 820 processor will be used to power ZenFone 3.
The company is possibly getting good prices for its Snapdragon 820 from ASUSTeK. The superior build quality suggests that Zenfone 3 Deluxe could get sturdier sales as compared to its predecessor ZenFone 2. This can help Qualcomm boost sales in the future.
Conclusion
Qualcomm is an ideal dividend growth stock that conservative investors should consider buying. With the company recovering from the 2015 Snapdragon hiccup, the stock will likely tread higher this year. As a result, the stock is a buy for now.
Disclosure: The author doesn’t have any position in the stock mentioned in the article.
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