This Tech Gem Offers Growth and High Dividends

For most of its existence, the tech sector has been known far more for growth than dividends. Technology is a highly cyclical and competitive industry. To stay ahead of rapidly-changing trends, most tech companies needed to retain as much cash as possible to reinvest back into the business. But this has changed a great deal in recent years. It is not unusual to find dividend-paying stocks in the tech sector. Still, even today high yields are hard to find in the tech sector. Broadcom Inc. is a unique stock. It has a dividend yield of nearly 4%, which is rare in the technology sector. Not only does its yield significantly exceed the around 2% average yield of the S&P 500 Index, it is among the highest-yielding technology stocks. Broadcom has broad appeal for investors interested in growth and income. Business Overview And Earnings Roundup Broadcom designs, develops and sells semiconductors under the following business units: wired infrastructure, wireless communication, enterprise storage and industrial. Its offerings include data-center chips, factory automation, energy systems and power generation, broadband access, and home connectivity. Broadcom is a fabless semiconductor company, which means that the products it designs are manufactured by other companies, so-called foundries. Broadcom recently re-domiciled to the U.S. and is now headquartered in San Jose. Looking at its second quarter, fiscal 2019, earnings results on June 13, you'll see the company generated revenues of $5.52 billion during the quarter, which represents an increase of 10% compared to the prior year's quarter. Broadcom reported earnings-per-share of $5.21 for the second quarter, which was a solid 7% increase over the $4.88 that Broadcom generated during the second quarter of fiscal 2018. During the second quarter Broadcom generated operating cash flows of $2.7 billion, while free cash flows totaled $2.5 billion during the quarter. Broadcom's guidance for fiscal 2019 was reduced, as management cautions investors of a possible global economic slowdown. Still, the company forecasts revenues of $22.5 billion, implying a revenue growth rate of 8% vs. 2018's. This is a highly satisfactory growth rate in a time of uncertainty. Operating margins are forecast at 52.5%, which represents an increase vs. the previous target for 2019. The revenue guidance includes the impact of the acquisition of CA Technologies, which closed in late 2018. Growth Catalysts Abound Broadcom's profitability has exploded over the last decade. Its earnings-per-share rose more than tenfold between 2010 and 2018. This earnings growth was driven by a significant amount of buying and merging, the most important merger being between Broadcom and Avago Technologies. Broadcom has since made several other major takeovers, including its purchase of Brocade for $6 billion that closed in late 2017, and its takeover of CA. These acquisitions naturally have impacted Broadcom's growth tremendously. By moving towards acquisitions in the software industry with its CA takeover, Broadcom has found a new way of generating outside growth. Broadcom's biggest market is wireless communications, where the company owns a strong connectivity portfolio that includes advanced technology such as LTE, Bluetooth 5.x, Wi-Fi, and Global Navigation Satellite Systems. Broadcom is also well-positioned in the enterprise storage market, where it provides switching and other connectivity and storage products such as SSD controllers. These markets will continue to grow, and even without any major acquisitions, Broadcom's revenues should continue to grow, as well. The combination of acquisitions and organic growth should result in solid revenue growth and increasing tailwinds from improving economics of scale, while buybacks also positively impact earnings-per-share growth. Broadcom returns significant cash to shareholders each quarter, through buybacks and dividends. A Fantastic Dividend Track Record Not only does Broadcom stock look attractive for growth, its above-average dividend yield of 3.9% adds significantly to the stock's total return potential. Broadcom's dividend payout ratio has risen considerably over the last couple of years, due to the large dividend increases that Broadcom has offered to its owners. Between 2010 and 2018, Broadcom increased its dividend by an incredible factor of 100-times. Broadcom's dividend still looks quite safe, as the company pays out less than half of its net profits in the form of dividends. A payout ratio below 50% indicates a sustainable dividend, especially since earnings are likely to continue growing in the years ahead. Investors should expect Broadcom to continue paying dividends, even in the event of a recession. Broadcom did not remain profitable during the last financial crisis, but the company was much smaller and less diversified back then. Due to its highly diversified business model, both in terms of product segments and geographic markets, the company is better positioned to weather future economic downturns. Another competitive advantage for the company is its impressive intellectual property portfolio, which includes more than 22,000 patents. Final Thoughts Broadcom is one of the largest semiconductor companies in the world. The company's fabless model results in high cash flows and low capital expenditures, which is why it has ample cash flow for dividend payments and acquisitions. Industry tailwinds should allow for compelling growth rates going forward. Broadcom's shares look fairly valued, and we rate the stock a buy for its high yield and compelling total return outlook. With interest rates falling and a natural reluctance among tech stocks to pay dividends, it is rare to see high-yielding stocks in the tech sector. Broadcom has a nearly 4% dividend yield, making it a hidden gem for income investors looking for high-quality tech stocks.

This Tech Gem Offers Growth and High Dividends

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