Broadcom Inc. designs, develops, and supplies various semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor-based devices and analog III-V-based products worldwide. The company operates in two segments, Semiconductor Solutions, and Infrastructure Software.
Market Cap: $221b
S&P Rating: BBB–
News: Broadcom buys VMware for $61 Billion. The second biggest deal in history after Microsoft bought Activision in recent months. With this merger AVGO plans for the next generation of infrastructure software. They are more than happy with what VMware has built and their skilled team.
Current situation and past performance
Broadcom is a beast when it comes to dividend growth. Besides the share price which isn’t easy to buy if you are a beginner investor, about every little detail is likable about the company. Currently trading at a forward P/E ratio of 14.3 (under 25 is an excellent healthy number). Better to look at the PEG ratio which is 1.04. This metric about AVGO is better than the rest in this industry.
(What is a PEG ratio and why it is better than the classic P/E? Proponents of the PEG ratio allege that it is superior to the P/E ratio as a valuation metric because the P/E ratio does not consider the company’s earnings growth. As a general rule, a PEG ratio of 1.0 or lower suggests a stock is fairly priced or even undervalued. A PEG ratio above 1.0 suggests a stock is overvalued.)
Such a beautiful thing to see like this on AVGO. The total return of investors’ money was 33.2% yearly in the last 13 years.
I can’t see almost any price volatility, always on a growth streak very aggressively. Stays always under the orange line which represents the „Good margin of Safety”. Always at around fair value!
Dividend standpoint
Broadcom has a record of 13 years of dividend paying and increasing. The current yield is 2.9%. Currently, the dividend yield is under the 5-year average but we can expect growth again in December.
If you want to take your stake from AVGO then it is a perfect time! Buy some shares before 20. September is the Ex-dividend date and takes your first check!
Like I just wrote in the first section, AVGO is a beast dividend grower company. The 5-year average growth on the dividend is 35%, and the last increase was 13.17%. Share buybacks can be a silent killer. If the company does not buy back shares but dilutes them then your investments are worth less over time. It is like a slice of cake where your slice will be smaller if the company dilutes its shareholders. AVGO issued shares over and over again since 2019.
The why and the comment on this comes from their CFO: “The initiation of a new share repurchase program reflects the confidence of the Board of Directors in Broadcom’s strong cash flow generation and provides us with a complementary tool to deliver value to our stockholders” – Kirsten Spears, CFO of Broadcom Inc.
The payout ratio is the metric to look at if the company is able to maintain for a long period of time their dividends. It stays always under 50% which is a very healthy number. Also interesting to see how much the company has outperformed the S&P 500 on the dividend side. AVGO has paid almost 6x times more dividends in the last 10 years than the famous index did.
Forecasting, future growth
The future does look good for investors. Based on 25 analysts the estimated future growth rate is 17.8% yearly. Analysts have a scorecard also which tells me that they are 67% right about the estimates of this particular company.
Debt situation
AVGO’s net debt to equity ratio is considered high at 145%. But it’s well covered by the operating cash flow (37.6%) and EBIT(6.4x coverage).
Fair Value
I use the most widely accepted method to calculate the fair value of a company which is the Discounted Cash Flow(DCF). It is based on the premise that the fair value of a company is the total value of its future free cash flows discounted back to today’s prices. I use analysts’ estimates of cash flows and assume the company grows at a stable rate into perpetuity.
(Total Equity Value = Present value of next 10 years cash flows + Terminal Value = $112.549+$141.883 = $254.432 Equity Value per Share (USD) = Total value / Shares Outstanding = $254.432/404= $630.07)
AVGO Stock Price
Risks and the overall takeaway
I’m invested in AVGO. But I tried my best to be neutral about the Article. Still, I think AVGO is one of the best investments you can make in the Tech industry. More than great capital appreciation, dividend growth cannot be unseen. Debt is well covered and it is more than the margin of safety category. Broadcom is a BUY!
Please note that nothing mentioned above shall be considered investment advice and shall be considered for informational purposes only. Make sure you make your own research before putting your capital at risk.
Great analysis Artenie! I would like to also add that return on invested capital for AVGO has increased too, so definitely a company worth reading more into.
I’m happy that you found it useful!