One of the most interesting companies that operates in the semiconductors industry is Broadcom Inc. (AVGO, Financial). The company is a California-based provider of connection solutions based on analog and digital semiconductor technologies.
The stock is appealing to investors with its forward dividend of 3.23% versus the S&P 500 index’s current dividend of 1.76%. Broadcom is currently paying a quarterly cash dividend of $1.75 per ordinary share or an annual dividend of $7 per share. The company has regularly distributed free cash flow to its shareholders for eight years and has steadily increased the dividend every year.
According to the chart of GuruFocus, the stock isn’t expensive. After a nearly 20% collapse from mid-June levels, the share price is now below the 200-, 100- and 50-day simple moving average lines.
Broadcom has a share price of $219.03 and a market capitalization of $94.55 billion on the Nasdaq.
With a price-book ratio of 2.81 and a price-sales ratio of 4.81, the stock is above the industry median of 1.85 for the first ratio and of 1.67 for the second ratio. Thus, you can wait for weakness that will drag the share price to valuations that are close to the 52-week low of $197.46. The 52-week high is $285.68.
The stock has a forward price-earnings ratio of 10.64 versus an industry median of 18.55. Analysts are predicting earnings per share of $20 for full fiscal 2018 and $20.56 for full fiscal 2019. Therefore, if we multiply the forward price-earnings ratio by a quarterly weighted average earnings per share of $20.42, we obtain a value of $217.27. That is a bit below the current share price.
However, regarding the price-earnings ratio, Broadcom is selling cheaper than most of its direct peers. Broadcom has a price-earnings ratio of 8.64. That means that the stock is granting an earnings yield of 11.6%, which is more than double the monthly average spot rate of high quality market corporate bonds. The HQM corporate bonds are securities representing the corporate loan issued by companies that are triple-A, double A and single-A rated by the market.Ă‚
Broadcom is committed to taking care of such yield with stock buyback programs. In April and May, the company repurchased its own common stock for about $1.5 billion. With that transaction, Broadcom withdrew something like 6.4 million shares from the stock market.
The company closed full fiscal 2017 with revenue of $17.636 billion, operating income of $2.383 billion and net profit of $1.692. Broadcom’s yearly revenue is growing at a rapid pace. Over recent years the annual revenue advanced nearly 56% on average, as is illustrated in below chart by GuruFocus.
Concerning the past profitability and growth of the company, GuruFocus has assigned a rating of 8 out of 10.
The primary markets for Broadcom’s products are wired infrastructure, wireless communications, enterprise storage, and industrial and others, in the Americas, Europe, Middle East countries and Asia. Broadcom is well-positioned in an industry that is expected to grow earnings at an annual rate of 15% over the next five to seven years.
Investors should look favorably at Broadcom because the company is proving to be a strong performer in terms of gross margin and free cash flow to total revenue. This is possible thanks to a solid business.
The portfolio of Broadcom is well-assorted with leading franchises in growth markets that will protect analog semiconductors sales from cyclical fluctuations expected in the sector.
Broadcom can sustain the business with a healthy balance sheet that GuruFocus is rating with a score of 6 out of 10.
Major catalysts include the massive synergy created by the July acquisition of CA Technologies and the promise of Broadcom to return a hefty portion of the free cash flow to shareholders in the form of dividends.
The Hart-Scott-Rodino antitrust waiting period on the merger has been cleared by Broadcom. Now the proposed acquisition needs approval from an ad hoc extraordinary assembly of shareholders of CA Technologies and European and Japan antitrust authorities.
Twenty-seven analysts have a recommendation rating ranging between buy and strong buy. Two analysts suggested to hold the stock.
Broadcom has an average target price of $288.61 per share. That is a mean of 33 estimates that range between a low of $220 and a high of $350. The average represents a 32% increase from the current share price.
Broadcom Inc. is reporting 431.68 million shares outstanding, of which 53.64% is held by institutions and 0.33% is held by insiders. The float is 78.9%.
Disclosure: I have no positions in any securities mentioned in this article.
