Before market open on Monday, August 22, 2022, Computer Services Inc [CSVI] announced that it entered into a definitive agreement to be acquired by a couple of private investment firms, Centerbridge Partners, L.P. and Bridgeport Partners. The merger is expected to complete in the fourth quarter of this year and shareholders will receive $58.00 per share of CSVI. CSVI is the only Dividend King representing the Information Technology sector. I won’t lie, CSVI was a serious consideration as to why I thought building out this Portfolio for the Ages consisting of Dividend Kings was possible. In June, the market was significantly down for the year, and there were several Dividend Kings that were underpriced. CSVI was one of them, as evidenced by the acquisition price of $58.00 being 53% higher than the previous closing price of $37.88.
I chose not to launch the portfolio with an immediate acquisition of 10-12 stocks. Instead, I advocated a one stock per week approach because one never knows how the market will behave. Of course, the market reversed and for the first six weeks of the second half of the year, the portfolio snagged Kings as they were rising in price but not before they hit their estimated fair values. CSVI had actually drifted slightly lower. The rest is history. I missed the opportunity. And not just this time, but quite possibly forever. Not only are they priced just shy of their merger-defined fair value of $58.001, when the merger completes, CSVI will cease being publicly traded and a Dividend King will be lost forever.
I’ve spent the following days searching for a suitable replacement from the Information Technology sector.
That search is over. Tuesday morning, Qualcomm Inc [QCOM] joins the portfolio.
The Search
Within the Sure Dividend Research Database, there are 47 dividend-paying companies in the Information Technology sector. Are there other technology companies paying dividends? Most likely. However, Sure Dividend is extraordinary in their research, and you can be assured that their database has the best of the dividend paying companies2. There are no technology companies looking at coronation any time soon. After CSVI, the next closest is Jack Henry & Associates, Inc. [JKHY] with 32 consecutive years of dividend increases. Then International Business Machines Corp [IBM] with 27 years. After that, Qualcomm Inc [QCOM], Microsoft Corp [MSFT], and Microchip Technology Inc [MCHP] all have 20 years.
JKHY has the strongest dividend history, but their dividend yield is 1.0%. It appears to be overpriced and its potential for growth is a bit limited right now. IBM has strong dividend history, with a high current yield of 5.2%. I was drooling over that dividend. It is in the process of increasing its potential for future revenue growth through a number of corporate initiatives. However, they appear to be appropriately priced. Now, I certainly could have looked at companies with lesser dividend increase streaks, but Qualcomm stands out and not just among Information Technology stocks. It has a strong dividend history with a decent yield, a strong growth outlook, and a high margin of safety.
Qualcomm Inc
Once CSVI completes its merger, the Dividend King universe will only have exposure to 9 of the 11 sectors. So, we adapt, we overcome. It is entirely possible to keep the portfolio confined to the Kings, but it is important to have exposure to all the sectors. It is a form of diversification. Thus, I ask you to forgive my departure from royalty and ask that you welcome Qualcomm into the fold. I doubt this will be the last departure, but I assure you that the return to investing in Kings is only a week away.
On March 9, 2022, Qualcomm announced a 10% increase to their quarterly dividend, marking the company’s 20th consecutive year of dividend growth. That’s an important milestone and based on their earnings growth and low payout ratio, it won’t be the last milestone. In fact, Qualcomm is like having a Rookie of the Year on a veteran roster. It is in a different phase of their lifetime than most Kings; it is still very much a growth company. Recently, Royal Dividends has added 100+ year-old companies to the portfolio, but “Quality Communications” was born in the house of Dr. Irwin Jacobs in 1985 when a small group of former Linkabit colleagues gathered to discuss telecommunications. I’ll bet the coffee was strong and delicious. The company they formed changed wireless communications forever.
Here is the profile from TD Ameritrade:
Qualcomm Incorporated is engaged in the development and commercialization of foundational technologies for the wireless industry. Its segments include Qualcomm CDMA Technologies (QCT), Qualcomm Technology Licensing (QTL) and Qualcomm Strategic Initiatives (QSI). QCT segment develops and supplies integrated circuits and system software based on third generation/fourth generation/fifth generation (3G/4G/5G) and other technologies for use in wireless voice and data communications, networking, computing, multimedia and global positioning system (GPS) products. QTL segment grants licenses or otherwise provides rights to use portions of its intellectual property portfolio, which, among other rights, includes certain patent rights essential to and/or useful in the manufacture, sale and/or use of certain wireless products, including, without limitation, products implementing CDMA2000, WCDMA, LTE and/or OFDMA-based 5G standards and their derivatives. QSI segment makes strategic investments.
The Details
Data as of 2022-09-04
| Name | Qualcomm Inc |
| Ticker | QCOM |
| Website | Investor Relations |
| Sector | Information Technology |
| Dividend Streak | 20 years |
| Last Price | $128.48 |
| Div Amt (quarterly) | $0.75 |
| Ann Dividend | $3.00 |
| Last Ann Div Inc | 7.5% |
| Dividend Yield | 2.3% |
| Payout Ratio (ttm) | 23.3% |
| Beta (5-yr, mon) | 1.24 |
| P/E Ratio (ttm) | 10.75 |
| Margin of Safety | 32.3% |
Qualcomm’s revenue and earnings per share were flat from 2012 through 2020 at $23.5 billion and $4.26, respectively. However, those numbers grew to $33.6 billion and $8.54 in 2021. The estimates for 2022 are $44 billion, with EPS of $12.55. In just two years’ time, revenue has nearly doubled, and earnings have nearly tripled. And true to form, the share price which oscillated around $60 during the 2012-2020 time period, took off when the market caught wind of some serious growth.
Top line (revenue) growth is very important, but growth of the bottom line (EPS) is even more important. Just before the market plummet of 2022, the share price danced above $180 (think 3 x $60), reflecting the fact that QCOM is earning on a whole different level now. However, trading in the $120s (think only 2 x $60) means it has been undeservedly sold off with the rest of the market.
Qualcomm is on sale this Labor Day. I’m going to visit the market on Tuesday and grab 8 shares. Maybe I’ll get a donut and coffee too.
1The closing price on September 2, 2022, was $56.90. This reflects the small possibility that the merger doesn’t ultimately go through for whatever reason. The implied probability of the merger not coming to fruition is less than 2%.
2Sure Dividend is open to requests for companies to be added to their research universe. Their database has grown substantially since its introduction a few years ago. At the time of this writing, there are 840 dividend-paying companies in their database.