As a dividend investor, I try to constantly balance my portfolio between yield and growth. Supplementing my retirement income is the primary goal, but getting capital appreciation with my holdings also influences my strategy. Sometimes investing in certain stocks/sectors can make you give up one or the other, while some stocks/sectors can give you both. As my readers may know, I am an avid REIT (VNQ) and BDC (in) investor because of the stable income they provide. They can also provide investors with capital appreciation, especially if you buy them at the right price. They are not known for their significant dividend growth, but for their low single digit growth over time.
Then there are some stocks that not only give you high dividend growth, but also significant capital appreciation. One of these is Broadcom (NASDAQ:AVGO), a specialist company focusing on semiconductor design, mainly centered around CMOS and analog llll-V technologies. In this article, I give 3 reasons why this stock is perfect for dividend investors.
Long term performance VS S&P
Broadcom is a global infrastructure technology leader focused on the technologies that connect our world. They are focused on technology leadership and category-leading semiconductor and infrastructure software solutions. From high-performance connectivity in our jobs and homes to wireless (connectivity) in our cars, the company has a hand in connecting everything we do or use in our lives. And the company continues to be a legacy of innovation. Despite the volatility in the stock market during the year, AVGO has performed extremely well during this period. In the chart below you can see that the company has significantly outperformed the S&P over the same period and beyond.
As a buy and hold investor, I like to look at a minimum of 5 years of track record when looking to invest in a company/business. This usually gives you a good history of the quality of the management/company. Additionally, looking further ahead can also give you a glimpse of how a company did during turbulent times. The Dot-com crash, the Great Financial Crisis, COVID, or even the high interest rates of the early 80’s are all data points I examine/reference. But depending on the company and how long they’ve been around, you may not be able to gauge how they performed during those times. But even with a few years of data, you should be able to get a good picture.
And seeing how AVGO has outperformed the S&P 500 in both price and total returns gives you a clear picture of their quality. Investing in the technology sector can usually bring some good returns to an investor and that is why many stocks in this sector usually trade at high premiums. Here you can see the % increase in the price of AVGO from the beginning of the year until now.
Despite inflation, rising interest rates, threats of recession, tighter consumer spending and rising credit card debt, all of which have weighed on the economy and some high-quality businesses, Broadcom has continued to be the most good in the face of this decline. And this high growth is expected to continue over the next few years.
Strong double-digit growth in the future
In addition to the company’s strong performance over a 3-, 5-, and 10-year period, Broadcom is expected to continue to grow revenue and earnings at a high rate over the next two years. One way I think the company will maintain this is with share repurchases. With VMware Inc. (VMW) deal closed, the company has resumed share repurchases and still had $7.2 billion left in the current program. Moreover, in 2023 they brought in a record revenue of $35.8 billion, representing a growth rate of 8% year-on-year. Net income also increased 22.5% year over year from nearly $11.5 billion to approximately $14 billion.
During the fourth quarter management stated that this was driven by semiconductor and infrastructure software revenues that were up 9% and 3% year-over-year, respectively. In the chart below, you can see that AVGO is expected to grow double digits in both earnings and revenue next year and into 2025. Revenue growth is expected to slow from ’25 to ’26, but will still grow by more more than 7%. So, the impressive growth trend is expected to continue and the company shows no signs of slowing down in the foreseeable future.
High dividend growth and safety
Since deciding to pay a dividend in 2011, AVGO has impressively increased its dividend for 13 years making it a contender. They also recently raised the dividend by more than 14% for an annual payout of $21.00. Even during COVID they managed to increase the dividend by double digits when some businesses were forced to stop or cut back. And management stated that they expect to pay this dividend of $5.25 per share throughout 2024, pending Board approval.
Furthermore, the dividend is well supported by the company’s cash flows. In the chart below you can see that free cash flow rose by double digits as well, from $3.9 billion in the first quarter to $4.7 billion in the fourth quarter. In total, the semiconductor paid out $7.6 billion in dividends, which gives them a very comfortable payout ratio of 43%, meaning they have plenty of room for further growth. And with the company’s strong business model and management team, I see them joining the prestigious list of Dividend Aristocrats in the next 12 years.
Seeing how the stock has outperformed the broader market, it’s no wonder it’s considered overvalued. But despite this, Wall Street analysts still rated the stock as a buy. Currently, the stock is down more than $10 at the time of writing to $1,115 per share, but is still trading near its 52-week high. With a 52-week low of $542, I think it’s safe to say investors likely won’t see that price again.
Using the dividend discount model, I have a future price of $1,400 per share for the company. Seeing their high growth supported by a strong business model, I think the share price will continue to rise in 2024. I also used a higher WACC due to the sector and growth rate over 5 years of last. And as most of my readers know, I like to be a little more conservative to manage expectations. This gives investors more than 25% upside from the current price target.
One risk the company faces is potential downside from the current price. Seeing how the stock has risen over this past year and the rich valuation, the stock could see a correction in its price. Using the average price target of $1,069, this could be a potential risk. But as the company faces downside risk, the stock could soar higher. I expect the price to experience some volatility but continue to do better in the long term.
For investors who typically trade in and out of stocks, you can definitely see some downside here. But for those with a buy-and-hold mentality, I think the stock is a buy. Another risk could be a possible slowdown in the economy, which is expected in 2024. And despite strong growth during the year, broadband revenue fell 9% in the fourth quarter year-over-year. And management expects this to continue through 2024 as the cyclical weakness in utilities at the end of this year is expected to continue.
Broadcom has performed exceptionally well this year, outperforming the S&P by significant margins in both price and total returns. The company seems to be doing all the right things, which I think makes them a Dividend Aristocrat in the making. Increased cash flows, share repurchases and superior pricing and total returns versus the broader market. All this together with the strong business model will continue to reward investors for the long term. Additionally, they have one of the best dividend growth rates in the sector with double-digit growth over the past 5 years. Although the company faces some risks going forward, I think that due to its strong cash flows, 13 years of dividend growth, and strong business model, the stock is a must-buy for long-term dividend investors.