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How Could High Leverage Impact Qualcomm’s Shareholders?

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Debt repayment a top priority

In the previous part of this series, we saw that Qualcomm (QCOM) would have a highly leveraged balance sheet at the end of fiscal 2017 when it completes its NXP Semiconductors (NXPI) acquisition. However, Qualcomm aims to reduce its leverage to pre-acquisition levels within two years from the close of the deal.

The company would slow down its share buyback program to channelize its FCF (free cash flow) toward debt repayment. In fiscal 1Q17, the company spent only $440 million toward share buyback against $2 billion spent in fiscal 1Q16.

The reduction in share buyback indicates that the company has found a more profitable investment opportunity that would drive future growth. This move was welcomed by investors, as future growth would give investors returns in the form of share price appreciation.

The reduction in share buybacks indicates that the company has found a more profitable investment opportunity that would drive future growth. This move was welcomed by investors as future growth would give investors returns in the form of share price appreciation.

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Cash flows

In fiscal 1Q17, Qualcomm’s (QCOM) operating cash flow fell 50% YoY (year-over-year) to $1.4 billion. The cash flow fell significantly as this was a slow quarter for the company’s licensing business that generates maximum cash flows.

The company’s cash flow may turn negative in the coming months if it loses the lawsuit against the Korean (EWY) regulator and has to pay the $853 million fine. However, this would be a one-off expense and affect the cash flow only in one quarter.

A more serious scenario could occur if the lawsuit creates a contagion effect and force other countries and customers to resort to the legal route to alter their licensing terms. This would have a long-term impact on the company’s cash flows, as licensing is the largest contributor to its cash flow.

Some analysts believe that the legal disputes would take a long time to settle. By then, the NXP acquisition would be complete and Qualcomm could diversify its revenue streams.

Dividend payments to shareholders

As seen from the above graph, Qualcomm spends roughly $780 million every quarter on dividend payments. The company has been increasing its dividend constantly every year. However, its rival Intel (INTC) disappointed investors by not increasing its dividend in fiscal 4Q16.

It remains to be seen whether Qualcomm maintains its trend of increasing its dividend in April 2017 amid the legal challenges that would hit its cash flows.

The challenge does not end here for Qualcomm. Along with the lawsuits and increasing leverage, the chipset supplier would face an even bigger challenge of integrating NXP into its business. Next, we’ll see how Qualcomm plans to ease the NXP integration.

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