QUALCOMM (QCOM) is a BUY

Qualcomm has been on my radar for a while now. More recently, a legal lawsuit coming from Apple (AAPL) made QCOM stock price drop by over 10% since the beginning of the year. It seems a great entry point for any investors looking to had a techno dividend paying company.

Business model:

Qualcomm Inc develops digital communication technology called CDMA (Code Division Multiple Access), & owns intellectual property applicable to products that implement any version of CDMA including patents, patent applications & trade secrets. The company derived most of its income from the smartphone business selling chips for power and network connectivity.

Main strengths:

QCOM rides naturally on the smartphone wave as 90% of its revenues is derived from this industry as it drives royalty from 3G and 4G utilization. We see another great year for the smartphone industry in 2017, therefore, Qualcomm should continue to benefit from this profitable business niche. QCOM has implemented both buybacks and dividend payment increases at the same time.

Potential risks:

On top of China, other governments are eyeing QCOM business model under the anti-monopoly regulations. This could hurt future royalty earnings and therefore reduce QCOM growth potential. QCOM owns near to a monopoly in CDMA technology patent which is why it can charge such high royalty fee (3-5%). Worst case scenarios include a diminution of royalty fees which would affect QCOM future earnings growth.

Dividend growth perspective:

QCOM business model benefits from very strong royalty generated through patents. Those patents will generate strong cash flow for the next decade to come. This money will definitely results in additional dividend increase in the future. The company has a great window to find other opportunities while it enjoys its royalties. The dividend payment should continue to grow steadily in the upcoming years.

Investment thesis:

As we believe royalties will continue to bring in the dough for a decade, QCOM is sitting on a sustainable business model giving it the possibility to grow even bigger. In 2016, the company has gained strong momentum on the stock market and we believe this uptrend will persist in 2017. Its strong relationships with smartphone makers gives QCOM an edge about what is coming in the newest technology needs. You can bet QCOM will also own patents in the future mobile industry.

Valuation:

Source:Dividend Monk Toolkit Excel Calculation Spreadsheet

I’ve used the double stage dividend discount model to determine QCOM fair value. I believe in the strong potential of the company and the DDM shows there is a clear opportunity at the moment. Once the legal lawsuit with Apple (AAPL) is resolved, QCOM could rise again.

disclaimer: Long AAPL, no position in QCOM yet.

How many trades should I make a year?

Is there a specific amount of trades an investor should make each year?

Interesting enough, I’ve been called a “trader” from time to time while I define myself as a dividend growth investor. Which type of investor suits me best? I would definitely vote for dividend growth investor, but I will also admit I trade a lot more than the classic dividend investor.

For many, the number of trades you make in a month or a year often define the type of investor you are. If you trade on a daily basis, you are most probably a penny stock trader or a technical analysis fan. If you trade on a monthly basis, you are an active investor, read trader. If you rarely sell any of your holding throughout years, then you can qualify as a buy & hold investor or a dividend growth investor.

I’m having a hard time with these definitions linked to the number of trades completed. In my opinion, there isn’t a minimum or maximum amount of trades you should complete each year. It all depends on where you are at with your portfolio and your investing strategy.

If you are like me and you have decided to divide your portfolio into two sections (core and growth), you will most likely sell one of your holding every year or two. My “growth portfolio” includes companies that I believe are undervalued for a specific reason. These trades are usually more volatile and include a higher degree of risk. In the past, I bought Seagate Technology (STX) while they were in the middle of a growth crisis doubled with a major flood affecting their production capacity. I also bought Apple (AAPL) before the company split as many experts thought their iPhone was about to die (that was before iPhone5… imagine!). Finally, I bought SNC Lavalin (SNC.TO) as the engineering firm was in the middle of a fraud scandal and was brought to justice by the Canadian Government. These are examples of timely trades where I might now keep these companies forever. My investing horizon for such holdings is 18 to 24 months. This is why I will most likely sell one company in my portfolio each year or two.

On the other hand, the core of my portfolio is built with a long term holding horizon in order to benefit from the full potential of compounding dividend growth. These companies are selected upon the 7 dividend investing principles and will most likely be part of my nest egg forever. However, as I previously mentioned, I still follow each of my holdings closely on a quarterly basis to make sure they all continue to show the following criteria:

  • Dividend payment growing each year
  • Payout ratios under control
  • Company is a leader in its market
  • Revenue and earnings on a growing trend
  • Company showing clear competitive advantages

These are key factors to ensure dividend growth over a long period. If a company ends-up failing to meet these criteria or doesn’t meet my investment thesis fundamentals anymore, I will pull the trigger and sell it. I’m not just content about receiving decent dividend income, I want each company I own to be prosperous and grow in value. As the economic environment changes rapidly, it is very possible that a company shows great characteristics today yet loses steam over the years. Some of them just hit a speedbump and are already working on solutions while others can’t find a way to get back on track.

Don’t become trigger happy, but don’t be too complacent

There is a thin line between becoming trigger happy and selling any company that fails to produce growth every quarterly report and being too lenient with management. As much as I want to make sure that each company I hold generates ever growing profits, I can also understand that the economy goes through cycles and there will be poor quarters in any type of industry. The idea is to be able to analyze why there are poor results and to look at what management is putting in place to get back on track.

Making too many trades will only increase your trading fees and reduce your dividend growth potential. Not making any trades could lead to you holding bad companies rotting your total return. There is a balance to reach between the two approaches and this is not easy. I guess the solution is not to determine an ideal number of trades to achieve each year. If you must sell 2 of your holdings during a bad year, so be it. Just make sure you don’t do it out of panic or lack of patience. Always review your investment thesis before pulling the trigger. As long as a company meets the reasons why you selected it in the first place, you should not be in a hurry to sell it.

Should I keep my stocks forever?

Is the classic buy & hold investing strategy dead? Is it just a fairy tale invented by an old generation of investors such as Buffett and doesn’t work anymore? You may read several articles telling you the buy & hold theory is dead. I don’t agree with this statement.

The main idea around dividend growth investing is to benefit from the compounding effect of the dividend growth in your portfolio. You can’t benefit from the compounding growth if you sell your stocks every 4-5 years. The following graph should show you the result of the buy & hold strategy:

As you can see, during the first ten years of this graph, both the S&P 500 and the aristocrats were bringing about the same return. However, the compounding effect of dividend growth started to bring more return after the techno crash. Patient investors have been rewarded handsomely.

The rationale behind this theory is simple. Imagine you use $100,000 to invest in 3M Co (MMM). Let’s assume the current dividend yield is 2.50%. Your money will then generate $2,500 per year. Now, imagine you keep MMM for 25 years and you reinvest their dividend payments during this period. For the sake of the calculation, let’s assume a 6% dividend growth rate. Here are the results of my calculations:

In the span of 25 years, your $100,000 investment has become $378,000 purely through the process of reinvesting the dividend payouts. Imagine now if MMM stock price is also growing in value… yup, you would probably get close to 1M$ in 25 years with an investment of $100,000. I know, those numbers defy our imagination, but they are real nonetheless. You doubt it? Here’s the real number showing MMM stock return over the past 25 years:

You read it right; over 1,330% return over the past 25 years.

It doesn’t mean you should keep all your holdings forever

The problem with the buy & hold strategy is that not every company produces MMM’s results. Therefore, you could be holding shares of companies that will not bring much to your portfolio over the next 10-25 years. I’m pretty sure you want to avoid that. While there are no magical secrets to determine if one company should be part of your nest egg forever, I can identify a few key elements:

  • Dividend payment growing each year
  • Payout ratios under control
  • Company is a leader in its market
  • Revenue and earnings on a growing trend
  • Company showing clear competitive advantages

By monitoring each company you invest in on a quarterly basis, you will be in a position to make sure each of the above mentioned criteria are in place. These companies should be held in your core portfolio forever. This is how you will unleash the full power of dividend growth investing.