Investor's Business Daily
Qualcomm Joins Ranks Of Dividend Payers
Wednesday February 12, 11:40 am ET
By Mike Angell
In a bid to keep shareholders happy, wireless chip company Qualcomm Inc. (NasdaqNM:QCOM - News) says it will start paying a dividend for the first time and buy back up to $1 billion of stock.
Once a staple of stodgy, old-fashioned businesses, dividends are gaining popularity with tech companies. Why? For one, potential tax changes could make dividends more attractive to investors. Second, as the era of hypergrowth fades, tech companies need new incentives to keep people from selling shares.
"When a tech company pays a dividend for the first time, it signals they may not have a whole lot of growth opportunities," said Jim King, a senior portfolio manager at Rydex Funds, which owns Qualcomm shares. "There's continual growth, but not a whole lot of untapped income."
Qualcomm investors will get a dividend of 5 cents per share every quarter. Anyone who holds Qualcomm shares prior to March 14 is eligible for the dividend.
Paying the dividend will cost Qualcomm $160 million a year. Qualcomm's board of directors will periodically review whether to keep paying the dividend or to keep the cash for company use.
The company also plans to buy back $1 billion worth of stock over the next two years. That represents about 4% of Qualcomm shares outstanding. "The combination of a dividend and a stock repurchase program demonstrates our commitment to long-term shareholder value," said Qualcomm Chief Executive Irwin Jacobs in a statement.
Graham Tanaka, who manages the $4 million Tanaka Growth Fund, said the decision reflects increasing confidence at Qualcomm.
"There's no hidden agenda here," Tanaka said. "This says we have a stable business, improving cash flow, and we think our stock is cheap."
In January, Qualcomm raised its fiscal 2003 earnings forecast. It cited higher anticipated sales of cell phones that use the company's proprietary technology. Qualcomm's 2003 earnings guidance went from $1.15 to $1.20 a share to $1.34 to $1.39 a share.
Dividend payers, such as utilities and other companies in mature industries, sometimes pay as much as 6% of their share price in dividends. Qualcomm will pay out less than 1% of the price of its shares.
That's probably not enough to lure dividend investors.
Nonetheless, "if a company has a lot of cash, it's a good idea to give some of that money back to shareholders," King said.
Qualcomm joins software giant Microsoft Corp. in adopting a dividend plan. Chipmaker Intel Corp. and IBM Corp. are some of the other big tech companies that pay dividends.
To some, the Qualcomm and Microsoft announcements have a political angle. Tanaka says issuing a dividend is calculated to get Congress to eliminate the so-called double taxation that occurs with dividends.
"There's a little hope that these companies will influence legislation," Tanaka said.
Dividends are paid out of a company's profit after taxes - the first tax. Shareholders then have to pay taxes on those dividends - the second tax.
In his recent economic stimulus package, President Bush asked Congress to eliminate the second tax for shareholders. That would eliminate $383 billion in tax revenues over the next decade, according to the Brookings Institution.
Qualcomm Chief Financial Officer Bill Keitel said the dividend plan will go through regardless of what happens with the legislation.
"We're hopeful there's some relief for taxpayers in regards to dividends," Keitel said.
Tax issues aside, dividends used to have a poor reputation among tech firms. Many once argued that cash would be better spent on research rather than dividends.
On the advice of the board of directors, shareholders of network gear maker Cisco Systems Inc. voted down a recent proposal to pay a dividend.
The board argued the money would be better invested back into the company. Still, Cisco said it may revisit the issue if favorable tax legislation comes to pass.
Tanaka says a select few tech companies so dominate their industry that they don't really need to keep growing as rapidly. Hence, they can give their cash back to shareholders.
In the cell phone industry, "Qualcomm is both the Microsoft and Intel," Tanaka said.
Tanaka won't guess which other companies might also start paying dividends.
But he says likely candidates have big, steady piles of cash on their balance sheets. The businesses are also cash flow positive, which means their everyday operations bring in more cash than the company has to pay out to employees and creditors.
"The commonality of companies starting to pay dividends is superior cash flow, dominant market share and a surplus of cash," Tanaka said.
King says it's likely tech companies will start re-evaluating their dividend policies as they see their markets getting saturated.
"It's usually when a company gets mature, when their products have penetrated so many markets," King said. "Companies figure they can't put the money to as good a use as shareholders."
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