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Technology giant Broadcom (AVGO) has been among the top-performing S&P 500 stocks in the last decade-plus. The company listed on the NASDAQ back in August 2009, right in the midst of the financial crisis. Since its IPO (initial public offering), Broadcom stock has returned 3,794% to shareholders. But after accounting for dividend reinvestments, total returns are closer to 5,230%.
So, an investment of $1,000 in AVGO stock, with dividends reinvested, soon after its IPO would be worth over $50,000 today, easily outpacing the S&P 500 ($SPX) and Nasdaq 100 ($IUXX). But historical returns don’t matter much to current and future investors. So let’s see if this blue-chip tech stock remains a top investment for the rest of 2023.
What Does Broadcom Do?
One of the largest tech companies globally, Broadcom designs, develops, and supplies semiconductor and infrastructure software solutions to its base of enterprise clients. Its semiconductor devices are used in end products, including data center networking, broadband access, telecom equipment, smartphones, and storage systems, among many others. Infrastructure software solutions allow customers to plan, develop, automate, manage, and secure applications across cloud, mobile, mainframe, and distributed platforms.
These two business segments allowed Broadcom to report revenue of $33.2 billion in fiscal 2022 (ended in October), up from $22.6 billion in fiscal 2019. Its adjusted EBITDA (earning before interest, tax, depreciation, and amortization) has risen from $12.5 billion to $21 billion, while free cash flow has expanded from $9.26 billion to $16.3 billion in this period.
We can see that, similar to other asset-light tech companies, Broadcom enjoys high-profit margins. For example, in fiscal 2022, it reported an EBITDA margin of 63% and a free cash flow margin of almost 50%, enabling the company to reinvest in organic growth and pursue highly accretive acquisitions.
Broadcom was initially a semiconductor stalwart but has entered the infrastructure software solutions segment in recent years, further diversifying its revenue base with big-ticket acquisitions of Symantec and CA Technologies.
Last May, it announced its intention to acquire a 100% stake in VMware (VMW) for a whopping $61 billion. If regulators allow this deal to proceed, the acquisition will allow Broadcom to add another $8.5 billion in pro forma EBITDA three years after closing the deal. Additionally, the combined company will provide enterprise customers with an expanded infrastructure solutions platform.
Is Broadcom Stock a Buy, Sell, or a Hold?
Despite a challenging macro-environment in the last 18 months, Broadcom managed to increase sales by 15% year over year to $8.9 billion in Q1 of fiscal 2023, compared to $7.7 billion in the year-ago period.
According to Wall Street analysts, Broadcom remains on track to increase sales by 7% to $35.5 billion in fiscal 2023 and by 4.5% to $37.1 billion in fiscal 2024. Comparatively, its adjusted earnings are forecast to expand from $35 per share in fiscal 2022 to $40.25 in fiscal 2024.
So, AVGO stock is priced at 16x forward earnings, which is not too steep. Moreover, the tech behemoth also pays shareholders an annual dividend of $18.4 per share, translating to a forward yield of 2.92%. With a payout ratio of well below 50%, Broadcom has enough room to keep increasing dividends in the future.
Broadcom first paid investors a quarterly dividend of $0.07 per share in December 2010, which suggests these payouts have risen by almost 40% annually in the last 12.5 years, making AVGO an exceptional dividend growth stock.
But there are certain risks to investing in Broadcom. In the last few years, it has raised significant debt to fund its acquisitions. The company ended fiscal Q1 of 2023 with $12.6 billion in cash and $39.4 billion in debt. It also indicates Broadcom will have to increase its balance sheet leverage to acquire VMware, weakening its financials further.
A rising interest rate environment and elevated inflation levels are bound to hamper the company’s bottom line. At the same time, the threat of a recession has already lowered enterprise spending in recent months.
It is unlikely that Broadcom will match its dividend hikes at a pace we have seen historically due to near-term macro headwinds. For example, in the last 12 months, dividends increased by “just” 12.2%.
The Final Takeaway
In my opinion, Broadcom is currently the best dividend growth stock in the S&P 500. It remains a compelling investment for long-term investors as the stock still trades at an acceptable valuation. Moreover, once the macro situation improves, AVGO should deliver outsized gains and outperform the S&P 500 index by a wide margin. Analysts also remain bullish on Broadcom stock and expect it to gain 9% in the next 12 months. After accounting for dividends, cumulative returns will be closer to 12%.
Keep an eye out for Broadcom's next earnings release, scheduled for June 1, 2023.More Stock Market News from Barchart
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