Broadcom (AVGO) has been regularly returning value to shareholders. The company pays dividends to shareholders and rewards them with share buybacks. With its fourth-quarter fiscal 2019 (ended November 3) release, Broadcom rewarded its shareholders with a dividend hike. The semiconductor giant also repurchased shares during the quarter.
Dividend hike and share repurchases
On October 1, Broadcom paid a cash dividend of $2.65 per share, bringing its total payment to shareholders to $1.05 billion. Then, the chipmaker announced a quarterly dividend hike of 23% during the fourth quarter, from $2.65 to $3.25 per share. The dividend is set to be paid on December 31 to shareholders as of December 23. The quarterly cash dividend will be equivalent to an annual dividend of $13 per share. Broadcom, which has a dividend payout ratio of 61.07%, has increased its dividend payout for the last nine years.
Broadcom’s dividend yield was 4.02% as of December 17. Peers Cypress Semiconductor (CY), Intel (INTC), Qualcomm (QCOM), and Nvidia (NVDA) also pay dividends to shareholders. Their dividend yields were 1.88%, 2.18%, 2.82%, and 0.29% yesterday, respectively.
During the quarter, Broadcom spent approximately $587 million on share repurchases and eliminations. The company repurchased around 1.5 million shares for approximately $433 million. Broadcom repurchased shares for $7.26 billion in fiscal 2018, and $5.4 billion in fiscal 2019. In March, the chip giant committed to buying back $8 billion in shares in fiscal 2019.
Share repurchases helped Broadcom partially offset its YoY (year-over-year) earnings decline. During the fourth quarter, the company’s adjusted EPS fell 7.9% YoY to $5.39 due to gross margin contraction and higher operating expenses. However, the company’s EPS beat analysts’ estimate by 0.7%, and were also 4.5% higher sequentially.
Broadcom’s cash flow
According to Broadcom’s capital allocation policy, it returns 50% of its free cash flow to stockholders in the form of cash dividends. The rest of the cash flow is used for share buybacks or acquisitions.
However, the semiconductor company did not generate significant cash flow in the fourth quarter. In fact, its cash flow fell YoY amid challenges in its semiconductor solutions segment. Furthermore, Broadcom’s debt increased on the back of acquisitions and investments.
In the fourth quarter, Broadcom’s operating cash flow fell 5.9% YoY to $2.48 billion, and its free cash flow fell 5.8% YoY. The company’s cash and cash equivalents fell YoY from $5.5 billion to $5.1 billion, and its long-term debt rose YoY from $17.5 billion to $30.0 billion.
Broadcom has a high debt burden
Broadcom has taken on high debt through back-to-back acquisitions to diversify sales. Last year, Broadcom purchased software company CA Technologies for $19 billion. Then, on November 4 of this year, Broadcom completed the acquisition of Symantec’s enterprise unit for $10.7 billion. Broadcom had initially wanted to acquire Symantec entirely, but the deal fell apart due to pricing issues.
After the sale of Symantec’s enterprise business, its consumer cyber safety business was rebranded to NortonLifeLock (NLOK). NortonLifeLock had also become an acquisition target. Last week, software company McAfee announced intentions to buy rival NortonLifeLock.
Broadcom’s recent acquisitions are part of its aim to grow in the software industry. The company has gained significant revenue from the addition of CA Technologies, and expects over $2 billion in revenue from Symantec’s enterprise business. Broadcom also plans to achieve cost synergies of about $1 billion next year after closing the Symantec deal, reports CRN.
During the company’s earnings call, Broadcom CFO Tom Krause stated that the company would use the capital returns for dividends. He said excess cash would be used to pay down debts.
Broadcom’s stock price movement
AVGO stock was up by 0.21% yesterday and closed at $323.80. At Tuesday’s closing price, Broadcom’s market capitalization stood at $128 billion. The stock was trading 22.6% below its 52-week high of $330.16 and 12.0% above its 52-week low of $230.33. Year-to-date, Broadcom stock had gained 28.5% as of yesterday. In comparison, the S&P 500 and VanEck Vectors Semiconductor ETF (SMH) had surged about 27.4% and 62.5% year-to-date.
We believe the company’s consistency in rewarding shareholders is appealing. Its regular dividend hikes and share buybacks could attract investors, and the stock could go higher. Progress in a trade deal between the US and China could also benefit chip stocks such as Broadcom.