A combination growth and dividend stock is rare to find. A growth stock gives shareholders returns through capital appreciation, which is related to its high earnings growth. However, as a company’s size increases, its growth reduces, and it starts giving returns through dividends and share buybacks. NVIDIA (NVDA) is an example of a growth stock, as it appreciated by 238% in calendar 2016. Qualcomm (QCOM), a dividend stock, recently increased its dividend by 10.5%. An example of a dividend and growth stock is Broadcom (AVGO).
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In 2016, Broadcom’s stock price rose 22%, and its dividend rose 53.7%. The company has shown strong growth for three consecutive years. Based on its high free cash flow of $2.7 billion and low dividend payout ratio of 27.8% in fiscal 2016, analysts believe that the company can continue to deliver strong double-digit growth.
Broadcom has witnessed strong earnings growth. The company’s revenue rose threefold from $4.3 billion in fiscal 2014 to $13.3 billion in fiscal 2016. Its non-GAAP (generally accepted accounting principles) operating income has risen 250%, and its EPS (earnings per share) have risen 134% over the last three years.
The company, which achieved growth through its aggressive consolidation strategy, has not only increased in size but also gained technological advancements. Over the last few years, Broadcom has acquired LSI, PLX Technology, and Emulex. It is now in the process of acquiring Brocade Communications Systems (BRCD), though it is facing regulatory scrutiny.
Broadcom has increased its long-term operating margin target from 40% to 45%, and it expects to achieve this margin through acquisitions and economies of scale. Analysts expect Broadcom to deliver earnings growth of 15% per year over the next five years, exceeding rivals Intel (INTC) and Texas Instruments’ (TXN) estimated growth rate of 10% per year.
Although aggressive acquisitions have expanded Broadcom’s portfolio, its primary focus continues to be connectivity. Its chips are used in mobile handsets, data centers, and IoT (Internet of Things) devices. The company is a leader in device connectivity and is well-placed to tap growth related to wireless data, the IoT, and cloud computing. However, Broadcom stock comes with risks. We’ll look into these risks in the next part of this series.