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A Look at Broadcom’s Dividend Growth Potential

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Feb. 28 2017, Updated 9:05 a.m. ET

Broadcom’s dividend policy

Previously in this series, we saw that Broadcom (AVGO) paid only 28% of its FCF (free cash flow) as dividends. The company expects acquisition, merger synergies, and incremental revenue, especially from Apple (AAPL), to boost its future FCF and improve its capability to pay a higher dividend.

FCF is an important variable as dividends are primarily paid from it. If a company increases its dividend, it indicates that it is confident about its future FCF.

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Broadcom has been increasing its dividend every quarter for the past 24 quarters. The company doubled its dividend from $0.51 in fiscal 4Q16 to $1.02 in fiscal 1Q17. However, it stated that it would be changing its dividend policy and increasing its dividend on an annual basis instead of the quarterly basis. Qualcomm (QCOM) increases its dividend on an annual basis.

Dividend yield and growth trend

In fiscal 2016, Broadcom paid a dividend of $1.94 per share, which equates to an annual dividend yield of 2,0%. Its dividend yield is higher than the industry average of 1.5%. Even more important to investors is a company’s dividend growth. Broadcom has increased its dividend by 71.7% between 2014 and 2016 and 246% between 2012 and 2016.

Broadcom has strong FCF, an above-average dividend yield, and strong potential to increase its dividend in the coming years, given the fact that it paid only 28% of its FCF as dividends in 2016. It intends to increase the dividend payout ratio to 50% in the long term.

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Future dividend growth

Looking at Broadcom’s business, it has strong future growth potential. The company has increased its revenue by 300% and FCF by 250% over the past three years. It expects to increase its FCF by 200% over the coming three years, which equates to annual FCF of $7.7 billion.

If the company maintains its dividend payout ratio at 28%, it has the potential to increase its dividend by 200% over the coming three years. The company seems to have already taken the first step in this direction by doubling its dividend in fiscal 1Q17.

Broadcom can increase its dividend by double digits for several years. However, high leverage could hurt the company’s dividend-paying ability in the future.

Considering Broadcom stock’s capital appreciation, it seems like investors are optimistic about the company’s growth potential. Next, we’ll look at the company’s stock performance. The PowerShares QQQ ETF (QQQ) has holdings in technology stocks, including 11.1% holdings in semiconductor stocks. It has a 1.4% exposure to AVGO, 1.4% exposure to QCOM, and 12.0% exposure to AAPL.

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