Qualcomm CEO Shuns Debt-Funded Payouts, Hoards Cash

Qualcomm Inc. (QCOM), the most cash-rich semiconductor company, needs to keep a large portion of those reserves to help maintain its dominance in the phone-chip market, Chief Executive Officer Paul Jacobs said.

While Jacobs said he is listening to investor calls for buybacks or a dividend boost as the stock languishes, he’s focused on investing in new products. Qualcomm, with more than $30 billion in the bank, won’t mimic some of its peers in taking on debt to deliver cash to shareholders, Jacobs said.

“People come to you and say things like, ‘Why don’t you lever up to buy back your stock?’” he said, in an interview. “My answer to that is, we’re not only investing in the current business but we’re investing in new opportunities.”

Growth isn’t the problem. Qualcomm’s sales have increased on average 31 percent annually per quarter since 2010, and last period’s expansion of 35 percent put Qualcomm among the three fastest-growing large technology companies in the Standard & Poor’s 500 Index. That hasn’t helped the share price, which has gained 7.1 percent this year, trailing about three-quarters of technology stocks in the index.

Apple Inc. (AAPL), which sold $17 billion of bonds in April, responded to a slumping stock price by returning $18.8 billion in cash to shareholders last quarter in the form of dividends and buybacks. Intel Corp., the world’s biggest semiconductor maker, issued $6 billion of debt in December to repurchase stock.

“Universally, investors are agitating for a higher rate of return of capital and we’ve seen a number of companies, the highest profile being Apple, make strides in the form of buybacks and dividend hikes,” said Alex Gauna, an analyst at JMP Securities in San Francisco. Jacobs “is still very much running a growth story.”

Dominant Position

Qualcomm, based in San Diego, is the largest maker of chips that run smartphones, powering dominant products such as Apple’s iPhone and some of Samsung Electronics Co.’s Galaxy devices. Its ownership of technology used by all modern high-speed mobile networks also allows it to charge royalties on equipment using non-Qualcomm chips.

Rather than following Intel (INTC) and Apple into the bond markets, Jacobs said he prefers to stay debt free. That will enable the company to keep investing in research and development even if the economy worsens, he said.

“Having a good war chest makes people realize you have the ability to absorb a good blow and come back,” he said. “We want to drive the new technology into the market as quickly as possible.”

Cash Reserves

Qualcomm ended its fiscal third quarter with $30.4 billion in cash and marketable securities and has no debt. Qualcomm is aiming to keep at least $5 billion in domestic reserves and currently has twice that amount, Jacobs said. The balance, held overseas, will stay there unless the U.S. government changes its policy on taxing profit that’s brought back into the country, he said.

Intel reported cash and investments of $17.4 billion at the end of the latest quarter.

Qualcomm paid out $2.2 billion from April through July 24, in dividends and stock repurchases, the company said. It has an indicated dividend yield of 2.1 percent compared with 4 percent at Intel and 2.7 percent for Apple.

For Daniel Morgan, a fund manager at Synovus Trust Co. in Atlanta, Qualcomm still presents more of an opportunity than the big slow-growth technology companies even if it’s not returning as much cash to shareholders. His firm is an investor in Intel, Microsoft Corp. (MSFT) and Hewlett-Packard Co. (HPQ)

“Of the ones we own, there’s not much to get excited about,” said Morgan, who helps manage $3.9 billion, including about 168,000 Qualcomm shares. “The power growth days are done.”

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net

To contact the editor responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net

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