Broadcom, Limited: Exceptional Growth at a Reasonable Price-With A Dividend Kicker


Investment Thesis

Broadcom Limited (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.

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 (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.”

Broadcom Limited: A Complex Technology Company

The following short business description courtesy S&P Capital IQ illustrates the technological complexity of this intriguing company:

“Broadcom Limited designs, develops, and supplies a range of complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products worldwide. The company operates through four segments: Wired Infrastructure, Wireless Communications, Enterprise Storage, and Industrial & Other.

The Wired Infrastructure segment provides set-top box system-on-chips (SoCs); cable, digital subscriber line, and passive optical networking central office/consumer premise equipment SoCs; Ethernet switching and routing application specific standard product; embedded processors and controllers; serializer/deserializer application specific integrated circuits; optical and copper physical layers; and fiber optic laser and receiver components.

The Wireless Communications segment offers RF front end modules, filters, and power amplifiers; Wi-Fi, Bluetooth, and global positioning system/global navigation satellite system SoCs; and custom touch controllers.

The Enterprise Storage segment provides serial attached small computer system interface, and redundant array of independent disks controllers and adapters; peripheral component interconnect express switches; fiber channel host bus adapters; read channel based SoCs; and preamplifiers.

The Industrial & Other segment optocouplers; industrial fiber optics motion control encoders and subsystems; and light emitting diodes.

Its products are used in various applications, including enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays.

The company was formerly known as Avago Technologies Limited and changed its name to Broadcom Limited in February 2016. Broadcom Limited was founded in 2005 and is headquartered in Singapore.”

Competition Risk

Furthermore, due to the diversity of the businesses and industries that Broadcom Limited operates in, it also competes with many of the most prominent technology companies in the world.  The following is a list of Broadcom Limited’s competitors, also courtesy of S&P Capital IQ:

“Broadcom Limited Competition

The company’s primary competitors in the wired infrastructure segment are Cavium Inc.; Intel Corp.; Finisar Corp.; GlobalFoundries; HiSilicon Technologies Co. Ltd.; Lumentum Operations LLC; MACOM Technology Solutions Holdings, Inc.; Marvell Corp.; Mediatek Inc.; Mellanox Technologies; Mitsubishi Electric Corporation; NXP Semiconductors N.V.; Quantenna Inc.; ST Microelectronics N.V.; and Sumitomo Corporation.

The company’s primary competitors in the wireless communications segment are Murata Manufacturing Co., Ltd.; Qorvo, Inc.; Qualcomm Inc.; Skyworks Solutions, Inc.; and TDK-EPC Corporation.

The company’s competitors in the enterprise storage segment include Cavium Inc.; Marvell Technology Group, Ltd.; Microsemi Corp.; and Texas Instruments, Inc.

The company’s primary competitors in the industrial & other segment are Analog Devices, Inc.; Cree, Inc.; Hamamatsu Photonics K.K.; Heidenhain Corporation; Renesas Electronics Corporation; and Toshiba Corporation.”

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 Limited 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 Limited 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

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