Recent Buy – Qualcomm Inc (QCOM)

I added to my position in Qualcomm Inc (QCOM). Qualcomm designs, develops, manufacturers and markets digital communication products. Qualcomm’s business segments include mobile device chipset manufacturing, mobile device royalties and strategic investments. Qualcomm is the leader in ARM-based chipset processors which can be found in the bulk of Android (GOOG), BlackBerry (BBRY) and Windows (MSFT) mobile devices. The licensing segment is used by almost all mobile device manufacturers including Apple (AAPL). The real winner from the smartphone/tablet/connected-cars wars really is Qualcomm. Qualcomm charges royalties on each handset sold based on its technology and one time licensing fees from handset vendors to use its proprietary technology.

Financials

Qualcomm’s revenue per share, earnings per share (EPS) and free cash flow (FCF) per share are extremely healthy. In addition, Qualcomm has no debt and holds $16.63B in cash.

Qualcomm’s industry leading processors are not only found in the latest Android, BlackBerry and Windows phones, but Qualcomm commands a formidable patent portfolio. Qualcomm currently generates 2/3 of its revenue from sales of mobile device chipsets and 1/3 of its revenue from royalties by licensing the technology. On  the earnings side, the numbers flip around – 2/3 from licensing and 1/3 from chip sales.

Dividends

Qualcomm is a Dividend Contender that has been raising dividends for 12 straight years in a row. The company has a 5-year dividend growth rate (DGR) of 16% and 10-yr DGR of 26.9%. The last dividend increase came in March 2014 with a hike of 20%. A current payout ratio of 34.50% gives QCOM plenty of room for future increases.

Valuation

With record profits and stock market all-time highs, companies have increased stock buybacks tremendously over the last few years. While this improves the EPS numbers of the stock, the book value takes a hit (read details here). While I am not completely against the idea of returning cash to stockholders via buybacks, I also like to make sure that the companies do not erode their book value. Being a value investor, I like to see the book value have healthy gains year-over-year. Qualcomm, during its March announcement, confirmed that they were increasing their stock repurchase program to $7.8B. However, due to the strong financials, the book value continues to grow and numbers stand at:

  • Book value growth of 4.1% in the last 12 months
  • Book value growth of 16.3% in last 5 years
  • Book value growth of 15.1% in last 10 years

Recent Buy Decision

  • Its business as usual with very agreeable growth in current markets. The smartphone/tablet wars between the different device manufacturers has one common element to it – Qualcomm. The business is robust and the innovation cutting edge. The strong patent portfolio brings QCOM a steady stream of revenue quarter after quarter.
  • A major source of growth in the short term is expected to come from China. China is in the midst of moving from 3G to 4G LTE wireless technology. China Mobile (CHL), which commands a respectable 65-70% of the Chinese wireless marketshare, has decided to offer discounts on smartphones that will run on Qualcomm’s 4G LTE technology. In the recent announcement, CHL has backed five-mode LTE-enabled handsets, which should benefit QCOM.
  • Recent acquisition of Wilocity has allowed QCOM to leapfrog the competition in the small cell market. The 802.11ad network technology, also called the WiGig technology, uses the 60GHz radio frequency and boasts a much higher speed than the 802.11 g, n, ac standards with data transfer speeds of up to 7 Gbps.
  • Qualcomm has thrown its hat into the Internet of Things (IoT) movement by forming a smart home platform. With this initiative, QCOM is expected to target home devices such as Smart TVs, set top boxes etc.
  • QCOM is also expected to benefit from the infant wearable market and if consumers latch on it this time, QCOM stands to benefit big from the chip sales and the licensing agreements similar to the smartphone/tablet market.
  • Another growth avenue in QCOM’s future is the In-Car Entertainment systems and the development of vehicular networks. Apple and Google have started their push to provide a platform for integrating their platform into the cars. The common factor here again is the necessity to communicate with the base stations and QCOM stands to benefit from the chip sales and/or licensing.

Risks

  • On the technology front, Qualcomm competes with GSM mobile phone technology, which is wildly prevalent outside North America and is an open source technology.
  • As the world moves from 3G to 4G (LTE/WiMax), Qualcomm has lost some of the hefty royalty pricing power on OFDMA-based LTE technology as it commanded on CDMA technology.
  • On a corporate front, Qualcomm faces intense competition from Broadcom, Mediatek and Intel.
  • Market saturation in the smartphone market.
  • The foreign currency fluctuations may impact future results.

A summary of the stock:

  • Symbol: QCOM
  • Quote: $78.11
  • 52-week range: $60.82 – $81.66
  • P/E: 20.87
  • Forward P/E: 13.63
  • Debt: $12M
  • Yield: 2.15%
  • 5-yr average yield: 1.70%
  • 5-yr DGR: 16%
  • 10-yr DGR: 26.9%
  • Book value: 22.69
  • Graham Number: 43.70
  • Chowder Rule: 18.1
  • Mean Analyst Recommendation: Buy
  • Mean Analyst target: $85.61
What are your thoughts on the future prospects of QCOM?
Full Disclosure: Long QCOM. My full list of holdings is available here.

Recent Sell – CHSCP, Mutual Fund

Some more ‘Recent Sells’ in the portfolio last/this week.
Partially Closed: Scotia Canadian Balanced Fund (mutual fund)
This holding was part of my wife’s portfolio and being an expensive fund (with an MER close to 2%), we sold this position, but only partially for now. The funds will not be invested elsewhere as we need the cash for our home downpayment.
Closed: CHS Inc (CHSCP)
CHS Inc was a high yielding, low-beta stock that I had used over the year to park my cash. I initiated this position in mid 2013 as I was unsure of where to invest. While I was going to make up my mind, I decided to get some juicy yields on the cash. That trade did not turn out that great as the stock price has remained fairly flat while the rest of the index has run off skyward. However, I can’t really complain with the yield close to 6% I was receiving on a quarterly basis. Going forward, I will be investing the cash from this sale into dividend growing companies which will result in a drop in my passive income initially, but should see a better total return over the long term. 
Full Disclosure: My full list of holdings is available here.

The Importance of Diversification: Part 2

This is part 2 of a two-part series where I discuss the importance of diversification in finances. In part 1, we saw the importance of diversification when it comes to investments and how the risk mitigates by selecting investments from various asset classes, sectors and geographical regions. This article will focus on the diversification of income. 
Income is the single biggest factor in wealth build up. To ensure that the build up can accelerate or simply to protect from unforeseen circumstances, you can employ various strategies to protect yourself from risks which could affect your future earnings.
What is diversified income?
Diversification of income can come in various forms. Income is generally classified as active income when you have to work for it and trade your time for a monetary compensation. This is usually the largest source of income in a person’s life. Secondary active incomes can be added by working part-time, what is generally termed side hustles in the media. A passive income is an income that is sourced without or minimal input from you. Investment income is generally a common source of passive income but there are plenty of other sources. I have discovered that passive income can be a grey area on the active-passive scale and depends on the source and the type/method. I have captured the various forms and ranked them in what I call Passivity Index.
Diversified income sources provide with many benefits. If you are married or living with a partner, having both partners earning brings income diversification immediately and protects you in case of emergencies such as temporal or permanent loss of employment. It comes as no surprise that married couples tend to be richer and separations/divorces have the exact negative effect – taking one of the worst tolls on personal finances.
Why diversify?
The popular saying of “Never put all eggs in one basket” not only applies to investments, but also to income. The need to diversify arises not only to mitigate risk due to external factors but also as a cushion for better living standards. Some reasons to diversify income are:
  1. Unforeseen circumstances such as job loss, disability, death of partner. This could be devastating financially and emotionally. Ensuring that your income is diversified can protect you from such factors.
  2. Financial independence: A diversified income can provide you with financial independence.
  3. Freedom to indulge in your passion: Like it or not, a majority of the people end up in professions which they do not like, or simply dislike the work environment or lifestyle. Alternatively, even if they loved something early in their career, tastes change and people long for career changes or the need for something different. A diversified income source allows people to dip their toes or quit their job allowing them to follow their passions.
  4. The health factor: It is not just about the wealth though. Being financially secure also results in a healthier lifestyle. Various studies have concluded that income and social status are the highest determinant in the health of a person and family. There are multiple explanations for the reasons including: reduced stress, better diet, better access to health & medical care, safer neighborhoods, more free time for exercising etc.

Have you diversified your income sources? How dependable are your side hustles and/or passive income streams?

Kinder Morgan Inc (KMI) Dividend Increase

Kinder Morgan Inc (KMI) announced a 2.38% increase in its cash dividend. The quarterly cash dividend will increase from $0.42 to $0.43 per share and payable on Aug 15, 2014 to shareholders on record as of Jul 31, 2014. The amount represents an increase of 8 percent from the second quarter of 2013 cash dividend amount. The annual dividend rate goes up from $1.68 to $1.72.
Kinder Morgan reported that the cash available to pay dividends rose to $332M, up 13% from a year ago and remains on track to meet or exceed its published annual budget of $1.78B in cash available to pay dividends.
My portfolio consists of 60 shares of KMI, which increases my annual dividends from $100.80 to $103.20. The yield based on today’s closing price is 4.66% and my yield-on-cost is 4.80%.

Omega Healthcare (OHI) Dividend Increase

Omega Healthcare Investors Inc (OHI) announced that its quarterly dividend will be raised by 2% from $0.50 to $0.51 per share. This dividend increase is the company’s eight consecutive quarterly increase. The new dividend is scheduled to be paid on Aug 15, 2014 to shareholders on record as of Jul 31, 2014. The new dividend rate results in an annualized yield of 5.40% based on yesterday’s closing price.
My portfolio consists of 100 shares of Omega Healthcare, which increases my annual OHI dividends from $200 to $204. My yield-on-cost rises to 6.43%.