Concentrated Business Risk
Generally speaking, investing in growth stocks is riskier than investing in blue chips. This is primarily due to the fact that most growth stocks pay little or no dividend. Consequently, as an investor you are generally subject to achieving a rate of return based solely on the price rising (capital appreciation). Additionally, since high earnings growth will be the primary driver of long-term price appreciation, you are also exposed to the possibility, and I would add, the logical likelihood that growth will eventually slow.
However, Broadcom Ltd (NASDAQ:AVGO) is different than most pure growth stocks. Although the company does grow as fast as most growth stocks could be expected to grow, the fact that it offers an above-average dividend yield, which is also growing, is a real plus. Consequently, on this basis I would suggest that investing in Broadcom Limited is less risky than investing in most pure growth stocks. Nevertheless, I believe one of the primary allures for investing in this company is above-average growth leading to above-average capital appreciation and a rapidly-growing dividend over time.
On the other hand, there are risks associated with achieving that growth. The rapidly changing technological environment is certainly a big one. However, specific to Broadcom Limited is the risk of customer concentration with Apple. According to MorningStar, in fiscal 2015 AVGO earned 24% of their revenue from Apple while Broadcom earned 19% of the revenue from Apple. Consequently, according to MorningStar, the combined Broadcom Limited is likely to generate 20% of their revenue from Apple going forward. There are many risks associated with having one customer representing such a significant portion of your business.
Broadcom Limited a Fundamental Analysis Video Presentation via FAST Graphs:
Summary and Conclusions
Broadcom Ltd (NASDAQ:AVGO) offers investors a rare opportunity from the combination of above-average long-term capital appreciation, above-average current dividend yield and the opportunity for above-average dividend growth. Furthermore, the company is available at a sound valuation. Although I believe there are risks associated with investing in Broadcom Limited, I believe they are well defined, and therefore, I believe the company is worthy of consideration.
Rarely will you find a company that transcends various investment objectives. In the case of Broadcom Limited, I believe it offers appeal to the total return oriented investor as well as the prudent dividend growth investor. But as always, I recommend comprehensive research and due diligence be conducted before investing.
Disclosure: No position
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
Note: This article is written by Chuck Carnevale and was originally published at FASTgraphs.com.
