Tuesday, January 18, 2011

Qualcomm fits into our Cash Flow Strategy

Qualcomm, symbol QCOM, is an excellent example of a stock that does not make the dividend machine cut but is a stock to consider for about a 10% gain in three months by writing a covered call, cashing the dividend and hoping someone buys it from you.

First, we want to make sure that QCOM meets our basic criteria because we do not know what the future brings and we may be stuck with this stock. QCOM is a technology company; it manufactures digital wireless telecommunications products used in all those new devices everyone is buying. This is a good industry in which to invest. QCOM earns $1.96 per share and pays out $.76 per share. At today's closing price of $53.03, the yield is 1.43%. Although this excellent company misses the dividend machine mark because the dividend is less than 3%, it has increased the dividend every year for at least 5 years. On January 6, the company declared a dividend of $.19. The company will pay the dividend on March 25 provided you own it by February 23, 2011. QCOM has almost no debt, sporting a D/E (debt to equity) ratio of .05. A company with a solid balance sheet.

Earnings continue to increase and the most recent earnings report was not a disappointment. This is why QCOM stock price is at a 52 week high of $53.03. The accelerating earnings make for call option possibilities. If you owned at least 100 shares today, you could sell 1 call option contract (1 contract for each 100 shares you own) for a price of $.96 per share. The contract expires in April. The strike price is $57.50. The strike price is the price the buyer of your option contract will pay you for your shares of QCOM if the price is at or above $57.50 on the expiration date of April 16, 2011.

Let's do the math. Buy QCOM at $53.03; sell the April call for $.96; receive the dividend in March of $.19; then sell the stock at the strike price of $57.50. Calculate your income as $57.50 +$.96 +$ .19 = $58.65. Subtract your cost basis from your income and you have a gain of $5.62. Divide the gain of $5.62 by your cost basis of $53.03 and you have a 10.6% return in 3 months.

This is good income investing.