Update July 21. After the close of the market yesterday, July 20, Qualcomm (QCOM), the biggest maker of chips that run mobile phones, reported net income of 97 cent a share for the quarter that ended on June 26. That beat the 73 cents a share earned in June quarter of 2015. Excluding one time items earnings came to $1.16 a share. Wall Street analysts had forecast earnings, excluding items, of 97 cents.
Revenue climbed to $6.04 billion, up 3.6% year over year. Now that might not seem much of an increase, but this quarter marks the first time in a year that the company hasn’t reported a double-digit drop in revenue. Analysts were looking for revenue of $5.59 billion.
Sure a big surprise since growth has pretty much disappeared for the makers of higher end smart phones, the part of the market that Qualcomm dominates.But this quarter Qualcomm saw an increase in licensing revenue from Chinese makers of chip sets for phones.
But Qualcomm wasn’t done with the surprises. The company raised guidance for the September quarter to $5.4 billion to $6.2 billion in revenue. Profit before items will be $1.05 to $1.15 a share, the company now forecasts. Wall Street had been looking for revenue of $5.72 billion and earnings of $1.08 a share for the quarter.
Qualcomm has been one of the best performers in my Dividend Income portfolio, climbed 17.79% as of the close today, from my original purchase date of May 5, 2016. The shares were up 20% for 2016 to date as of today’s close.
That higher price per share unfortunately lowers the dividend yield but Qualcomm still yields 3.53%. The company raised its quarterly dividend from 48 cents a share to 53 cents share in April. The next dividend of 53 cents a share will be paid to shareholders of record as of August 31, 2016.
I like the trend in the company’s business and its ability to grow revenue, finally, during what isn’t the easiest market for smart phones. And I like the growth in the company’s dividend–to 53 cents a share now from a quarterly 42 cents a share in March 2015. I’m keeping Qualcomm in my Dividend Income portfolio.
Tomorrow I’m adding shares of Qualcomm (QCOM) to my dividend portfolio in an effort to pick up a higher than average yield on the recent general slump in technology shares, and in the shares of companies in the smart phone business in particular.
Qualcomm has been in steady slide since November–when the stock closed at 60.87 on November 3. The high for the last 52 weeks is $71.32. The price at today’s close was $50.92.
That has brought yield on these shares up to 4.18%, above average for even the big old-school technology stocks that have made the transition from growth stocks to value/dividend plays. Intel (INTC), which I also hold in my dividend portfolio, yields 3.43%. Cisco Systems (CSCO) yields 3.87%. Microsoft (MSFT) pays 2.89%.
Qualcomm’s dividend will be paid to shareholders of record on June 22. The ex-dividend date is May 27 and the record date is June 1.
I’ll understand if you want to wait until later in the weak summer quarter for technology stocks before picking this up. Maybe Qualcomm will retreat a bit more and give you a better yield. But the company’s higher than average dividend at a time when yield is hard to find is likely to support the shares in any general sector weakness.
It’s common these days for personal finance gurus, financial advisors, and, of course, mutual fund company CEOs to lament the proliferating flavors of ETFs (exchange traded funds.) And I’d agree that we probably really don’t need an ETF that gives the owner three-times downside leverage to the price of oil, or one that specializes in an index of cyber-security stocks, or yet another ETF that slices and dices emerging markets according to some catchy set of initials.
But last I looked nobody was holding a gun to my head to make me buy any of these alternatives. And I more often than not these days find myself appreciating the ability to fine-tune exposure to a sector using the “tweaks” of an ETF.
Which is exactly the case for ETFs that invest in preferred stocks. These are vehicles designed to appeal to dividend income investors since preferred shares pay higher rates of dividends than do common shares. And, theoretically, they are less risky than a portfolio of common shares since preferred dividends get paid first and are less liable to be slashed by a company looking to preserve cash.
I say “theoretically” since not all preferred dividends look equally safe these days–investors and analysts are nervous right now about bad debt and cash flow at some banks with big exposure to the energy sector. And a cut in dividend isn’t the only potential source of risk to a portfolio of preferred stocks. For example, banks are big issuers of preferred shares and the financial sector has been one of the worst performers of 2016 what with the aforementioned risk of bad loans in the energy sector and the uncertain direction of the yield curve because of negative interest rates at most of the world’s biggest central banks and a conviction that the U.S. Federal Reserve isn’t going to raise interest rates in 2016 as expected earlier. Banks make more money when the yield curve sharpens. That was expected to take place in 2016; it hasn’t yet; and looks disappointingly less likely, the market has concluded, this year.
All of which makes the difference between the iShares U.S. Preferred Stock ETF (PFF) and the Market Vectors Preferred Securities ex-Financials ETF (PFXF) so exactly to the point. If you think financials are ready for rebound, then the iShares Preferred ETF is your choice. About 62% of the fund’s holdings are preferred shares in the financial sector and with a rebound you can expect to collect the ETF’s 5.82% yield and some appreciation as the financial sector recovers. If, on the other hand, you think problems in the financial sector have further to run, your choice would be the Market Vectors Preferred ex-Financials ETF, because the ETF, as it’s name says, eschews financials. The portfolio for this ETF holds preferred shares from the likes of Tyson Foods, ArcelorMittal, Alcoa, and United Technologies rather than the preferred shares from HSBC, Ally Financial, Barclays, Wells Fargo, and Citigroup that make up the top five holdings at iShares Preferred. The biggest sector weightings for the Market Vectors Preferred ETF are in real estate investment trusts (35%), electric utilities (26%) and telecom (10%.)
The yield on the Market Vectors ETF is a little higher at 5.97% versus 5.82% (as of January 31) and the risk, in my estimation, is a little lower. (Fees are slightly higher at Market Vectors at 0.53% versus 0.47%.) I added the Market Vectors Preferred Securities Ex-Financias ETF to my dividend income portfolio on February 23 at the closing price at day of $19.26.
Kinder Morgan’s (KMI) decision to cut its dividend to 50 cents a share certainly wasn’t popular with the market and especially not with the income investors who had stuck with the company when it rolled its MLP (master limited partnership) Kinder Morgan Energy Partners into the Kinder Morgan general partner at the end of 2014. At the time of the consolidation Kinder Morgan had said it would pay a dividend of $2 a share in 2015 and projected a 10% annual increase in dividends through 2020. The December 8 announcement of a 75% cut to the dividend devastated the stock. Kinder Morgan shares are down roughly 50% from $32.68 back in October to a close at $17.42 on Tuesday, February 23.
But as painful as that drop has been, the dividend cut has positioned Kinder Morgan to be one not just one of the survivors but actually one of the few winners from the bust in the U.S. oil and gas sector. By cutting the dividend Kinder Morgan has moved into a position where it doesn’t need to tap equity or debt markets–at the current high cost that the financial markets are charging energy companies to raise capital–in order to fund its planned capital spending budget for 2016. After paying the new lower dividend, the company projects cash flow of $3.6 billion in 2016, up from $1.2 billion in 2015. That’s enough to fund the company’s $3 billion plus in projected capital spending for 2016. And at this point it looks like the company will be able to fund its 2017 capital plan internally as well. (Kinder Morgan has a backlog of some $18 billion in capital spending projects it could invest in. In the current environment the company is high grading those projects, looking for those that provide the biggest return on investment. It’s that dynamic plus the company’s sizable cash flow that has led an investment manager–probably Ted Wechsler–at Warren Buffett’s Berkshire Hathaway (BRK.B) to buy about $460 million in shares of Kinder Morgan recently.)
The advantages of being able to invest using internal cash at a time when the cost of external capital is so high for energy companies and when market turmoil is resulting in delays in competing projects are obvious. The company projects that these investments plus returns on current assets will generate about 88 cents a unit in growth to 2020. That’s a compound annual growth rate of about 7%, Credit Suisse calculates. That kind of growth would enable Kinder Morgan to restore some of the dividend it slashed in December, especially if sometime during that period financial markets cut the price that energy companies have to pay for external capital. At Tuesday’s closing price of $17.42 Kinder Morgan showed a dividend yield of 2.88%. Not stunningly high but not a bad place to start if the company is able to increase dividend payouts after 2016 or 2017.
The big question, of course, for any investor is how accurate those cash flow projections are likely to be.
These projections look as solid as projections can be. About 90% of the 2016 earnings before depreciation and amortization projection is fee-based rather than price-based so Kinder Morgan’s pipeline and storage system is relatively well buffered from the price of oil and natural gas. Of that 91% about 75% is take or pay–meaning Kinder Morgan gets paid whether the customer uses its pipelines or not–the rest is volume based. Of that volume-based 25%, about 80% is attributable to natural gas and refined product pipelines where, Credit Suisse believes, risk of volumes falling is relatively low. Kinder Morgan also looks relatively well protected from further deterioration in energy company balance sheets with 82% of its top 25 customers rated investment grade or better.
Kinder Morgan projects that a drop to $20 a barrel for West Texas Intermediate and to $1.75 per million BTUs for natural gas would result in only a $120 million hit to its budgeted dividend coverage.
Credit Suisse has a $20 one-year target price on Kinder Morgan. I think any gains in the price will depend on a turn in sentiment on energy stocks–and I’m not willing to call that yet. But cash flow does look very positive for dividend income investors.
Tomorrow, October 23, I will add shares of Verizon (VZ) to my Dividend Income Portfolio. Verizon’s shares closed at $45.89 on October 22 with a 5.06% yield.
Verizon reported third quarter earnings on October 20. By and large the numbers were so-so.
Earnings of $1.04 a share beat Wall Street estimates of $1.02 a share by a not so whopping two cents a share. Total revenue in the wireless segment grew 5.4% year over year. The number of retail subscribers increased by 4.3%. However, retail total postpaid average revenue per account (ARPA) dropped 5.5%.
But for income investors there was one really important and exciting number. In the quarter total retail churn dropped to 1.21%, down from 1.29% in the third quarter of 2014.
Why is the churn rate so important? For Verizon and other wireless companies one of the biggest expenses is acquiring customers. Which means that any customer that doesn’t have to be replaced—who renews when the current contract expires—is extra valuable.
And you can see that drop in churn reflected in the big increase in cash flow. Cash flow from operations rose to $28.4 billion for the first nine months of 2015 versus $23.2 billion in the first three quarters of 2014. Free cash flow for that nine-month period was $15.9 billion against $10.5 billion in the first nine months of 2014. (The falling churn rate isn’t solely responsible for that increase but at a time when competitors are going aggressively after Verizon’s customers, a falling churn rate in an extremely important sign.)
That’s a lot of that cash stuff that income investors want to see. Remember that paying a 5.06% dividend takes a lot of cash and remember that in the current global economy slow growth in individual markets and volatile currencies can take a sudden bite out of the cash available to sustainably pay that hefty dividend.
Verizon’s falling churn rate and its huge free cash flow are big “sustainability insurance” policies.
The company paid out $6.4 billion in dividends in the first nine months of 2015. That was easily exceeded by the $15.9 billion in free cash flow and the $28.4 billion in cash flow from operations in that period. Verizon spends a good chunk of cash each year on building out infrastructure and new products. Currently the company is spending big on its efforts to become a mobile purveyor of original content. And Verizon’s dividend history doesn’t show a record of generous increases in the quarterly payout. But at least with the company’s lines on cash flow, you can feel that the dividend is very safe.
That’s not a minor point for dividend investors looking to diversify a dividend portfolio heavy on energy holdings as my dividend income portfolio currently is. Energy plays offer very high yields right now but I don’t think we can say that those dividends are secured by a river of cash flow. At a time when finding sustainable cash flow in the energy sector is subject to uncertainty, I like the security of Verizon’s falling churn and rising cash flow.