Will a $1 Billion Lawsuit Kill This Company’s Dividend?

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Safety Net

Chipmaker Qualcomm (Nasdaq: QCOM) is in the middle of a much-talked-about dispute with Apple (Nasdaq: AAPL), one of its largest customers.

Apple is suing Qualcomm for $1 billion. The claim is that Qualcomm abused its power as the dominant telecom chip provider by charging excessive royalties.

As a result, Apple is withholding royalties it owes Qualcomm until the matter is settled.

Qualcomm argues that it did nothing wrong. And most experts believe the company’s contract with Apple is enforceable, so the royalty funds should be released at some point.

But all of this makes income investors nervous.

They are attracted to Qualcomm’s 4.1% yield and its 15-year history of annual dividend hikes. But can the company sustain the dividend in light of Apple refusing to pay its bills?

Last year, Qualcomm’s free cash flow was $6.86 billion. It paid out $2.99 billion in dividends for a payout ratio of 44%, which is fairly low.


As a result of the quarrel with Apple, cash flow is forecast to fall to $5.44 billion this year. It’s expected to bump back up to $6 billion in 2018.

Qualcomm just raised the quarterly dividend to $0.57 per share. If we assume the share count will stay the same as it was at the end of the fiscal second quarter (ending in March), Qualcomm will pay out $3.39 billion in dividends this year.

That’s still a comfortable 62% payout ratio – even with a large customer refusing to pay Qualcomm what it is owed.

SafetyNet Pro’s dividend safety ratings measure the likelihood of a dividend cut in the next 12 months.

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It’s hard to know how the Apple situation will play out over the coming years. Short term, most experts agree that Qualcomm will eventually be paid what it is owed.

So for the next year or so, Qualcomm’s dividend is safe.

Longer term, that may depend on how the Apple dispute is resolved.

Dividend Safety Rating: B

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Good investing,

Marc