Investment Thesis
Broadcom Ltd (NASDAQ:AVGO) has historically been, and is expected to continue to be a growth stock. On the other hand, the company is also an attractive dividend growth stock as well. The combination of high growth and above-average dividend yield is rare.
This becomes especially intriguing when you consider that their cash flow generation is extraordinary, their dividend payout ratio low and their dividend growth rate one of the highest I’ve ever examined. Consequently, even though the dividend yield is above average, the opportunity for the dividend to grow over time appears enticing.
But as previously stated, Broadcom Limited has been, and is, a growth stock. The long-term capital appreciation the company has generated for shareholders has been significant. Couple that with the rapidly-growing dividend suggests that Broadcom Limited offers a noteworthy opportunity for above-average long-term total return. Therefore, I am comfortable in proposing that Broadcom Limited looks like a have-your-cake-and-eat-it-too research candidate. The cake would be the capital appreciation potential and the eating part would be the above-average yield and fast growing dividend.
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But perhaps best of all, the company appears fairly valued based on almost every fundamental metric you could measure it against. Later in the video associated with this article I will be covering valuation extensively. However, as a cautionary note, Broadcom Limited is a complex technology company, and as such, its business model might be difficult for many investors to understand – yours truly included. But with that said, the rate of return and dividend growth prospects the company offers indicate that Broadcom Limited might be worth making the effort to learn more about it.
Shareholder Friendly Management
Broadcom Limited has historically achieved its rapid growth through mergers and acquisitions. In addition to increasing in size, this activity also keeps it relevant with current technological advancements.
The current company was formed through the merger of AVGO and Broadcom. Furthermore, on November 2, 2016 they announced the acquisition/merger of Brocade Communications Systems, Inc. (NASDAQ:BRCD) which is currently under Federal Trade Commission review. Brocade stated that they still expect the merger will be consummated in the second half of its fiscal 2017. Here is a link to a slide deck describing the acquisition. I especially like this recent acquisition because I consider Brocade currently undervalued and therefore an attractive acquisition.
MorningStar considers Broadcom Limited’s management team as good stewards of shareholder capital. The following excerpt from MorningStar’s analyst notes provides more detail and insight:
“Broadcom Limited is undergoing an aggressive consolidation strategy by merging with several chipmakers, including LSI, PLX Technology, Emulex, and, most notably, Broadcom to rename the combined firm “Broadcom Limited.” All in all, we view these deals as reasonable ones for the company that made strategic and/or financial sense. We also like the firm’s move to vertically integrate into storage by buying Brocade, which we viewed as an undervalued asset.
Although this consolidation strategy will leave Broadcom Limited a bit more debt-laden than others within the cyclical semiconductor industry, we like that Broadcom has clear intentions to improve its balance sheet upon the integration of each new acquisition. The company has also steadily raised its dividend each year and targets a roughly 10% annual dividend increase, which we see as achievable.”
