Introduction and Background
In mentation for an aboriginal status successful perchance the adjacent 5-10 years, I americium successful the process of converting portion of my 401k holdings, which for galore years I person held successful communal funds, into idiosyncratic dividend growth stocks. These volition beryllium partially replacing the US equity portions of my holdings. I volition proceed to clasp communal funds successful bonds and planetary equity for wide diversification. I volition mean into this alteration implicit a play of time, truthful that each period oregon truthful I volition beryllium looking for attractively valued dividend maturation stocks to person to.
As portion of my status planning, I whitethorn usage the 72(t) regularisation to entree funds successful my 401k penalty-free, early. My leader besides allows maine to entree 401k funds astatine property 55 punishment free. I consciousness similar the income watercourse from dividends volition beryllium a much predictable root of funding, particularly if I request to adhere to the restrictions of the 72(t) substantially adjacent periodic payments. My wide portfolio weightings from a diversification position volition not change, but the US equity information of the portfolio volition see important dividend paying idiosyncratic stocks.
I person been managing a dividend maturation sub-portfolio for astir a decade. I person refined my process implicit time, but fundamentally, I support a watchlist of the highest prime dividend maturation stocks, and regularly update their valuations specified that I tin person assurance successful paying just worth oregon below, thereby besides maximizing my income. It besides happens that implicit the past decade, my actively managed dividend maturation portfolio has outperformed the passive communal funds, portion besides providing recurring income, which the communal funds bash not.
One of my favorite, first-pass screens is to look for those stocks connected my watchlist that are trading adjacent to their 52-week lows. For this exercise, I decided to filter my watchlist by companies that person precocious reported net and that are trading astatine little than 30% of their 52-week scope (52-week debased being 0% and 52-week precocious being 100%).
Using this archetypal walk criteria, we volition beryllium looking astatine the pursuing database of companies:
Fair Value Estimation
As I've described successful erstwhile articles, I similar to cipher a just worth successful 2 ways, utilizing a Historical just worth estimation, and a Future just worth estimation. The Historical Fair Value is simply based connected humanities valuations. I comparison 5-year average: dividend yield, P/E ratio, Shiller P/E ratio, P/Book, and P/FCF to the existent values and cipher a composite worth based connected the humanities averages. This gives an estimation of the worth assuming the banal continues to execute arsenic it has historically. I besides privation to recognize however the banal is apt to execute successful the aboriginal truthful utilize the Finbox just worth calculated from their modeling, a Cap10 valuation model, FCF Payback Time valuation model, and 10-year net complaint of instrumentality valuation exemplary to find a composite Future Fair Value estimate.
I besides stitchery a composite people terms from aggregate analysts including Reuters, Morningstar, Value Line, Finbox, Morgan Stanley, and Argus. I similar to spot however the existent terms compares to expert estimates arsenic different information point, and arsenic somewhat of a sanity cheque to my ain estimates.
Plotting 3 variables connected 1 crippled is tricky but utilizing a bubble crippled allows america to visualize 3 variables by plotting the Historical just worth versus the Future Fair Value connected a modular x-y chart, and past usage bubbles to correspond the size of discount comparative to expert estimates.
This illustration is insightful erstwhile you recognize however to construe it. What we are looking for are stocks that are trading astatine a discount to some the Historical Fair Value and the Future Fair Value. So, those stocks that are farther to the left, and farther to the bottom, are perchance the stocks trading astatine the largest discount to just value. This would beryllium the bottommost near quadrant of the graph. Additionally, those stocks with the biggest bubbles are the stocks that are trading astatine the largest discount to expert estimates, truthful successful theory, stocks successful the little near quadrant that besides person ample bubbles, should beryllium precise decent candidates for investment.
Digging into this illustration suggests that Qualcomm (NASDAQ:QCOM), 3M Company (MMM), and Microsoft (MSFT) are attractively valued from a Historical and Future Fair Value perspective.
I presently ain each these stocks and judge that each could beryllium an fantabulous campaigner for further investigation, and imaginable investment, particularly for semipermanent investors.
In the tone of afloat disclosure, I person precise precocious added to my positions successful some Microsoft and Qualcomm. I americium truly excited to put successful some of these companies, and judge that long-term, they volition beryllium exceptional investments, particularly considering the contiguous accidental to bargain them astatine charismatic valuations.
My past nonfiction was an in-depth look astatine Microsoft, and I inactive judge it is precise relevant. You tin work it here.
In my past article, I suggested I should astir apt person written astir Qualcomm, since, astatine the time, it besides looked to beryllium attractively valued. Well, let's bash that this time.
Qualcomm Preliminary Analysis
I similar to commencement elemental erstwhile analyzing companies. Qualcomm has a 5-year mean Return connected Equity of 73% and Return connected Invested Capital of 25%. The caller figures are adjacent higher astatine 93% and 43% respectively. These are perfectly fantabulous values, and bash not suggest immoderate benignant of degradation. One yellowish emblem is that RoE is astir treble RoIC, which could mean that the institution is utilizing excess indebtedness to foodstuff RoE. However, with some values being truthful high, this inactive looks precise attractive. We volition analyse the indebtedness communicative aboriginal successful the article. Morningstar's Narrow Moat and Standard superior absorption ratings are ok. I bash wonderment if they are giving Qualcomm capable recognition for the beardown IP that they person successful captious components, arsenic opposed to lumping them successful with different commodity constituent suppliers. It is this beardown IP that has created immoderate challenges and risks to their concern exemplary implicit time, owed to its adjacent monopolistic power implicit cardinal components. Qualcomm is presently 4-star rated astatine Morningstar, suggesting it could beryllium undervalued. Now, looking astatine the dividend, Qualcomm's 26% Earnings-based payout ratio and 50% Free Cash Flow-based payout ratios suggest the dividend is precise comfortably covered and sustainable. The 5-year dividend maturation complaint of adjacent to 6% is somewhat little than I similar to see, but the starting output astir 2.6% helps offset the little growth. With my estimated maturation complaint for Qualcomm being good supra the dividend maturation rate, I consciousness this is simply a precise safe, charismatic concern enactment for the dividend maturation investor.
Finally, for our preliminary assessment, let's look astatine the Seeking Alpha Ratings Summary and Factor Grades.
First, from a ratings summary perspective, SA Authors and analysts person beardown bargain ratings successful spot for Qualcomm. Looking astatine the origin grades, Qualcomm's valuation and profitability scores look attractive, and the maturation and momentum scores are supra average. It scores poorly connected the fig of caller revisions, which person each been downward. This suggests to maine that we whitethorn beryllium warring momentum and short-term challenges, but long-term, I judge this is inactive a beardown campaigner for semipermanent investment.
A cardinal portion of semipermanent investing is ensuring that a company's strategy is coagulated implicit the agelong term, and that the institution is executing good against that strategy. Qualcomm has immoderate fantabulous worldly to assistance america rapidly recognize the strategy and progress. The astir caller net study here, and the caller automotive capitalist time presentations here, here, and here, are immoderate fantabulous resources. Let's deed immoderate highlights.
The divided retired of gross for Full Year 2022 shows however important the handset concern is to Qualcomm. Handset processors and modems are 2 precise important components successful this business, and some person travel nether onslaught successful past years. At this constituent though, Qualcomm's superior exertion has been capable to flooded immoderate of the tendency to alteration to alternate supply. A large effect was the caller triumph of the bulk of the 5g modem concern for the caller Apple (AAPL) iPhone lineup, which was somewhat of a astonishment based connected Apple's precise nationalist tendency to determination to alternate suppliers.
One of the breathtaking aspects of Qualcomm is that it looks similar respective of their concern segments proceed to acquisition beardown growth. The information that the handset gross watercourse grew arsenic overmuch arsenic it did, erstwhile it is simply a comparatively mature market, is exciting. The Internet of Things gross watercourse maturation is besides exciting, and determination are galore fascinating merchandise opportunities that should assistance successful the future. Starting successful 2023, Qualcomm is readying to consolidate RF front-end into the different segments.
The 3 remaining segments volition person a alternatively astonishing Total Addressable Market successful the adjacent decade.
For me, 1 of the opportunities that appears the astir breathtaking is Automotive. In 2022, it was the smallest segment, and yet erstwhile we look astatine aboriginal maturation potential, it is amazing.
Considering that Automotive is presently $427M for Qualcomm, and they are projecting that the Total Addressable Market by 2030 is $100B, but much importantly, person an existent pipeline that they judge could let them to triumph $30B of that seems excessively bully to beryllium true.
They are taking a precise broad attack though, providing afloat level solutions with their Snapdragon architecture.
The magnitude of the Total Addressable Market that they deliberation they volition beryllium capable to code besides continues to increase, and they person a enactment position. The maturation successful the Design-win pipeline shows the breathtaking potential, and the alignment of the Qualcomm strategy to the marketplace direction.
The projected gross maturation associated with this maturation successful accidental and pipeline wins looks perchance conservative, but inactive precise attractive.
Another facet of the automotive strategy that is breathtaking is the licensing opportunity. Even if Qualcomm doesn't triumph each of the architecture proviso opportunity, due to the fact that of their beardown IP position, they volition apt inactive person licensing gross from the bulk of connected assets. Today that is worthy astir $5 per connected vehicle.
Additionally, I similar to spot that the Qualcomm architecture is somewhat aboriginal proof. There are a batch of obstacles to flooded to get to afloat autonomous vehicles, however, I judge that semi-autonomous features, particularly arsenic they amended safety, are a given. Qualcomm's architecture and exertion enactment each these scenarios.
After this little dive into the Qualcomm strategy, I stay precise excited astir aboriginal prospects. Qualcomm is simply a person successful their areas of technology, with beardown IP extortion and licensing to capitalize. They besides person aggregate value-streams investing for the future, and astir indications are that they are positioned to stay a leader. Furthermore, the Total Addressable Markets for the markets that they purpose to service look to person important maturation imaginable good into the future. I americium excited astir Qualcomm's strategy and the advancement they are making with that strategy. I privation to ain a portion of that.
Qualcomm Historical Valuation Analysis
Since I americium replacing a diversified, wide marketplace US Equity communal money partially with Qualcomm, let's commencement by seeing however that instrumentality compares implicit clip to the S&P 500, not that past is simply a warrant of aboriginal results, but it is inactive thing I similar to consider.
We tin spot implicit the past 5 years that Qualcomm has importantly outperformed the S&P 500. Some of the challenges and lawsuits of the past that challenged Qualcomm's show look to beryllium down them, and the caller show has been precise strong. Considering the imaginable valuation currently, determination is simply a bully anticipation that outperformance tin continue.
Outperformance successful the past is 1 thing, but possibly that outperformance was conscionable owed to valuation multiples. That's wherefore valuation is important. To cognize if we should see investment, we privation to beryllium definite we are buying fundamentals, not conscionable exuberance. Two of my favourite archetypal indicators of valuation are P/E and yield.
Ignoring the earlier years erstwhile Qualcomm was facing immoderate litigation issues, Qualcomm's P/E ratio of 10 looks beauteous charismatic by itself, particularly for a increasing company, but besides looks charismatic historically erstwhile compared to its 5 twelvemonth mean of astir 16.5. Yield is besides a bully indicator for dividend paying stocks. The existent output astir 2.6% is inactive beneath the 5-year mean of 3.1% but is trending higher. We besides apt request to disregard immoderate of the earlier years erstwhile the licensing concern exemplary was truly being brought into question, and determination was important lawsuit satisfaction, starring to higher concern hazard assessment.
A cardinal portion of the Total Shareholder Return includes banal buybacks, which are besides important to dividend maturation sustainability. Qualcomm has slowed down connected stock repurchases arsenic of late, but they are inactive somewhat much than offsetting equity based compensation, thereby avoiding shareholder dilution. This isn't overly affirmative but is besides not a large negative.
We pointed retired earlier from the RoE and RoIC that Qualcomm whitethorn beryllium utilizing indebtedness to summation Return connected Equity. Looking astatine their gross versus nett indebtedness shows that Qualcomm has been expanding indebtedness dilatory implicit time, however, it appears gross has accrued much rapidly than debt. With an A S&P recognition rating, they are inactive a precise financially beardown company.
In bid to instrumentality vantage of the beardown maturation opportunities for their merchandise lines, Qualcomm has had to summation investments significantly. As agelong arsenic the gross maturation continues to compound astatine the rates that it has, this is apt to beryllium a precise bully investment, agelong term, but this is thing that volition request to beryllium watched. If returns commencement to decline, it could beryllium indicative that the markets they are investing successful are becoming much competitive, starring to little margins and opportunity.
Qualcomm has been paying a increasing dividend for astir 20 years. Their maturation has been coagulated and sustainable. The 7.5% caller dividend maturation is conscionable supra the mean 5-year dividend maturation of astir 5.5%.
Obviously, dividend maturation doesn't bash immoderate bully if the maturation is not sustainable. In this case, Qualcomm's net and escaped currency flow-based payout ratios person remained consistent. This is different denotation that the semipermanent dividend payout and maturation should beryllium sustainable. With payout ratios of 25% based connected earnings, and 50% based connected escaped currency flow, determination is simply a batch of borderline to support the dividend.
Based connected these assorted indicators of valuation based connected humanities perspective, Qualcomm appears to beryllium fairly, if not under-valued, particularly considering the imaginable aboriginal maturation opportunities.
Qualcomm Future Valuation Analysis
Because we privation our dividends to turn successful the future, not conscionable the past, we request assurance that the results the institution has already achieved volition apt continue.
Looking astatine aboriginal Earnings Per Share projections, we tin commencement to spot wherefore possibly Qualcomm appears to beryllium undervalued currently. The projections suggest a bumpy thrust successful the adjacent fewer years. Now, agelong term, bumpy investments tin inactive beryllium bully investments, if the halfway concern doesn't degrade during the process, but successful the abbreviated term, it tin instrumentality the capitalist for a roller-coaster ride. I bash similar to look astatine it different mode though, if those bumps effect successful decreases successful banal price, but the cardinal concern is inactive dependable and yet growing, it tin make immoderate large opportunities to bargain and compound dividend maturation done re-investment.
Growth is 1 of the hardest things to foretell successful investing, otherwise, investing would beryllium overmuch simpler. As we discussed, aboriginal maturation projects immoderate turbulence. In the lawsuit of growth, I bash similar to look astatine humanities maturation estimates. In the lawsuit of Qualcomm, mostly maturation projections person been good supra 10%.
My ain estimation for Qualcomm's guardant maturation is astir 16%. I deduce this from a operation of assorted maturation projections and maturation models. Based connected the results of the strategy study, I don't consciousness similar this is wholly unrealistic, though it could beryllium optimistic shorter-term. Qualcomm's caller EPS maturation has been good supra this number.
For a dividend maturation investor, knowing aboriginal dividend maturation imaginable is besides important, particularly successful arsenic overmuch arsenic it is sustainable. Here are the semipermanent dividend maturation projections for Qualcomm. The forecast maturation looks precise consistent. At slightest for the adjacent fewer years, it seems apt that Qualcomm volition proceed solid, if not particularly high, dividend growth.
Based connected this forecast, and what we've seen already arsenic acold arsenic net maturation and projected dividends, it shouldn't travel arsenic a astonishment that the net payout ratio is besides forecast to beryllium good controlled for the adjacent future. The debased levels of the payout ratio forecast suggest determination volition beryllium country for incremental concern backmost into the business, accrued dividend payouts beyond the forecasts, oregon incremental stock buy-backs. All of these are affirmative for the capitalist looking for sustained dividend growth.
As already covered, the maturation successful expected gross for the adjacent respective years is 1 of the questions that is apt starring to the little existent valuation. However, it should supply for fiscal stableness and dividend security.
Let's beryllium honest, you tin bash a batch worse than Qualcomm from a hazard perspective. The S&P recognition standing of A, Moody's recognition standing of A2, and A+ Value Line Financial Strength standing each attest to the prime of this company.
That aside, determination are a fewer risks to discuss. Qualcomm inactive relies heavy connected the licensing of its IP for a batch of its revenue. These licensing arrangements successful the past person led to lawsuits by customers and competitors for unfair concern practices and person besides made them a people for IP infringement lawsuits, arsenic good arsenic disruption to their technologies. At this point, it appears that Qualcomm has been capable to support a capable competitory vantage to flooded immoderate of this dissatisfaction and has besides taken other measures to amended relationships with cardinal customers. The precocious exertion markets that they play successful supply immoderate obstruction to entry, but the precocious margins and marketplace maturation imaginable besides invitation much contention and disruption.
For the dividend maturation investor, Qualcomm appears precise safe. Based connected Seeking Alpha's dividend grades, it doesn't get overmuch better.
I besides similar to look astatine short-term hazard indicators for immoderate caller investments, with Short Interest being 1 cardinal indicator for maine that I mightiness beryllium missing thing that others mightiness know.
Based connected the precise debased abbreviated involvement presently successful Qualcomm, this would not marque maine hesitate to initiate oregon adhd to my presumption successful this prime company.
As I stated astatine the opening of the article, I precocious enactment my wealth wherever my rima is and added to my presumption successful Qualcomm. I person held Qualcomm since 2015. It has not ever been the astir unchangeable concern for me, and has adjacent downright frightened maine a fewer times, but overall, it has been a precise bully full instrumentality and dividend maturation concern for me. I americium particularly excited astir the maturation successful the Total Addressable Market for the products that they are developing, the grounds of beardown competitory vantage I spot successful galore of their caller concern wins, with immoderate customers adjacent coming backmost to them aft swearing them off, and I judge Qualcomm is precise good positioned moving into the future, particularly with maturation successful the Internet of Things and Automotive segments.
As portion of the analysis, 3M and Microsoft were besides identified arsenic being attractively valued from a Historical and Future Fair Value perspective. Many of america are apt alert of the receptor extortion and PFAS risks that are presently unsettling 3M. I person a ample presumption successful 3M and program to clasp but volition apt not adhd astatine this time. On the different hand, I americium precise bullish connected Microsoft, and frankly can't judge it is inactive connected sale, allowing maine to precocious adhd adjacent more. Please work my caller article, which is inactive precise relevant, to spot my thoughts, here.
This nonfiction was written by
Why DividendRodeo? It's not the chaotic thrust that investing sometimes provides that I'm addicted to, it's that unreserved that an ever-increasing travel of passive income provides. I bash not person a fiscal inheritance - my inheritance is really engineering - but I person been a self-directed capitalist for implicit 20 years.My investing attack is beauteous simple. I judge successful prudent surviving - striving to unrecorded an upstanding beingness of meaning good wrong my means, prudent moving - moving hard successful my vocation to maximize worth to my employer, and my opportunities for vocation progression, and prudent investing - investing successful precocious prime instruments astatine tenable valuations for the agelong term.Dividend maturation investing fits maine precise well. I judge I tin place precocious prime companies astatine tenable valuations that I americium comfy holding for the agelong term. The passive income from the dividends helps maine clasp done troubled times. Employing automatic dividend reinvestment helps maine dollar-cost-average, and the treble compounding I get from growth, arsenic good arsenic reinvestment, helps maine spot the tangible result of my efforts.Hang connected and bask the ride!
Disclosure: I/we person a beneficial agelong presumption successful the shares of MMM, AAPL, INTC, MSFT, QCOM, UNP either done banal ownership, options, oregon different derivatives. I wrote this nonfiction myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary concern narration with immoderate institution whose banal is mentioned successful this article.