When we think dividend tech stocks, we often think of popular companies such as Apple (AAPL), Microsoft (MSFT) or Nvidia (NVDA). Those companies have two things in common: They offer great growth potential, but also pay a ridiculously small yield.
Is it possible to find a tech stock that would give us both? A company like IBM (IBM) could come into mind as it offers a very generous yield in this sector (around 4.5%). The problem is that IBM’s core business is still slowing down. The shift towards the cloud business seems quite difficult and other players are just doing it better. IBM hopes its shipping blockchain based solutions will provide additional growth as it is hard to replicate. Your dividend is safe and will continue to increase, but do not expect much besides that from your investment in this aging monolith. I have a better pick for you.
Introducing Broadcom (AVGO)
Broadcom--the combined entity of Broadcom and Avago--boasts a highly diverse product portfolio across an array of end markets. Avago focused primarily on radio frequency filters and amplifiers used in high-end smartphones, such as the Apple iPhone and Samsung Galaxy devices, in addition to an assortment of solutions for wired infrastructure, enterprise storage, and industrial end markets. Legacy Broadcom targeted networking semiconductors, such as switch and physical layer chips, broadband products (such as television set-top box processors), and connectivity chips that handle standards such as Wi-Fi and Bluetooth. The company has acquired Brocade, CA Technologies, and Symantec's enterprise security business to bolster its offerings in infrastructure software.
Broadcom is in a bowl of growth. It manufactures one of the best RF filters used by all high-end smartphones to improve connectivity. Companies, like Apple, would not risk their connectivity, right? AVGO’s large size brings economies of scale and enables it to build millions of filters. Its growth-by-acquisition strategy has been quite a success in the past 10 years. The company has developed a unique expertise in acquiring companies, integrating them and making sure they generate strong returns. Broadcom is like your “tech ETFs” that will find a way to benefit from any tailwinds in this industry. In a decade, AVGO went from $2B to nearly $24B+ in sales.
As opposed to many tech companies who are focused on a single growth vector (5G, IoT, AI, cloud, etc.), Broadcom offers a portfolio of products that will surf on all those tailwinds. AVGO enjoys a larger position in each new smartphone with its RF components as this is what increases the connectivity in your phone. But there is more to it.
Its semiconductor solutions (75% of revenue) will also include products for industrial automation, company’s networking and storage (cloud) along with wireless enabling technology. Its infrastructure software (25% of revenue) will cover mainframes, cyber security and storage area networking (SAN).
Finally, the company isn’t just about growth by acquisition. Broadcom also invest massively in R&D ($5B in 2020) to ensure organic growth. About 20% of its revenue comes from high-end smartphone sales (RF filters). You can imagine this trend to continue to grow in the coming years.
A quick look at the dividend triangle will tell you that revenue keeps growing year after year (this is what we want, right?). However, earnings are quite hectic. This is explained by Broadcom’s appetite for acquisitions. If you look a dig a little further in their quarterly statements, you notice that adjusted earnings growth is healthy. And most importantly, this is reflected in their cash from operations:
Now that we know that Broadcom can increase both its revenue and cash flow, let’s take a deeper look at its dividend growth perspective. From the Dividend Triangle (from $0.50/share in 2016 to $3.60/year in 2021), this looks promising.
Dividend Growth Perspective
Broadcom isn’t a classic dividend payer. It needs lots of cash to finance its fast growth and the R&D required to keep its edge. Still, the company successfully increased its dividend yearly since 2010. The payout ratio seems quite hectic and out of norm (over 100% many times). This is caused by multiple charges related to its acquisitions and other events. It is better to investigate their investors presentation or follow the cash payout ratio. The cash payout ratio is under control (under 50% over the past 5 years). As expected, shareholders received another dividend increase in late 2020 (from $3.25 to $3.60 +10.8%). Going forward, investors can expect a mid to high-single digit dividend growth. That’s not too bad for a high growth tech stocks offering a ~3% yield, right?
As AVGO becomes larger, its debt has grown accordingly. Losing a major partner, living through an economic recession, or losing market share could badly hurt. If sales go down, AVGO’s clients may want to renegotiate. Broadcom is vulnerable during negotiation with companies like Apple and Samsung. We saw the kind of damage Apple could inflict (Qualcomm, anyone?) in the event of a disagreement. Finally, there is always a risk when a business is growing through acquisition. Their latest move (CA) didn’t seem to please the market at first. With such market volatility, the appetite for debt may reduce and AVGO will face challenges keeping up with its growth by acquisition strategy.
AVGO is among the rare dividend tech stocks I like and that I don’t own. The only reason Broadcom is not part of my portfolio is due to my large exposure to this sector in my portfolio. I believe it is more important to keep my portfolio well diversified across many sectors instead of picking all the great dividend tech stocks on the market.
Nonetheless, if you have been disappointed by the yield offered by many of those companies, Broadcom comes at an interesting idea for your portfolio.
Mike Heroux, Passionate Investor & founder of Dividend Stocks Rock
P.S. On a side note, I’ve hosted a free webinar about retirement and the withdrawal mechanics and you can watch the free replay here.
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