DGI Adventure 02-06-17 Sold Cash Secured Put + Investment Thesis  – QUALCOMM Incorporated (QCOM) – $51.50 strike – Feb 10 Expiration

This trade was actually executed on Thursday 01/26/17. I didn’t get a chance to write about it until today.

Please visit the core philosophies article on my investment thesis process for a deeper explanation of the components of this article.

I have updated the portfolio and income tracker back at the mothership to reflect this position.

Dividend Cycle

QCOM goes ex dividend on February 27, which is a few weeks after this contract expires. The quarterly distribution is $0.53/share. This will be the fourth quarter at this distribution amount. I expect the next payment to represent a raise since QCOM is a dividend contender, boasting 14 years of consecutive increases. This contract will expire well before the ex-div date, so I stand a chance of collecting this quarter’s dividend if shares should get assigned. The premium nearly equals the dividend distribution, so I’m good either way.

Investment

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The QC (Quantitative Case)

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SPL (Strike Price Logic)

I like QCOM at a 4% yield, which at the current distribution represents a $53 share price. $51.50 is well below that. The company has some legal trouble at the moment and no shortage of issues in China. Methinks a margin of safety is warranted.

QWaF (Qualitative Warm and Fuzzy)

QUALCOMM owns 3G and 4G technology. And they enjoy a steady stream of royalty income as a result.

Mobile technology is the lynchpin of modern society much less modern capitalism.

As long as people expect mobile technology to send and receive data, QUALCOMM will be there making money.

CPR (Cold and Prickly Risks)

QCOM’s business model is primarily based on collecting royalties on the aforementioned technologies that they own. Government regulators and/or lawsuits could seriously poop in that punch bowl. That’s why the stock price plummeted on news of Apple’s lawsuit last month:

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QCOM 3 Month Chart – Courtesy Google Finance

I sold this put after the recent Apple lawsuit was announced. I believe that QUALCOMM will be able to defend its patents and royalties. 

Even if they can’t entirely defend that revenue, it will take years before it has an impact.

The current balance sheet and cash flow are extraordinarily healthy and should help guide them through this legal storm.

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