Broadcom (AVGO) is a semiconductor company that sells its products to customers from different industries, such as wireless communication and enterprise storage. Broadcom is a member of the Nasdaq 100.  

The Nasdaq 100 is an index of the biggest 100 non-financial companies that are listed on the Nasdaq stock exchange. The index is heavily weighted towards the technology and biotechnology industries. This focus means that the average stock in the index is producing relatively high earnings growth rates, but the dividend yield of the index is not overly high.

Company Overview           

Broadcom has recently moved its headquarter to San Jose, CA. Before that, the company, which was created through a merger, was based in Singapore. Broadcom is a fabless semiconductor company, which means that it designs and sells chips, but the production is outsourced to so-called foundries.

This business model means that Broadcom can operate at high margins, and there is no need for extensive capital expenditures. A huge portion of the company’s cash flows can therefore be used for shareholder returns or to make acquisitions.

Broadcom’s most recent quarterly results were announced in June, the company was able to grow its revenues by 20% to $5.0 billion during the quarter. Earnings per share rose to $4.88 during Q2, 32% more than during the previous year’s second quarter.

Growth Prospects       

Broadcom was able to grow its earnings per share by more than factor 40 over the last decade. This massive growth was driven by several huge takeovers, as well as by the fact that profitability was low ten years ago. More recently the earnings per share growth rate has come down to a still very compelling 20%+ rate.

Due to the fact that maintaining such a high growth rate becomes harder the bigger a company gets, it is likely that Broadcom’s earnings per share growth rate will fall further over the coming years.

Wireless communications is the most important market for Broadcom. The company has a strong portfolio in this segment, which includes advanced LTE, Wi-Fi, and Bluetooth products. This is a market that will continue to grow, which should provide some top line growth potential for Broadcom. The same can be said about Broadcom’s enterprise storage segment, which offers switching and other connectivity solutions.

Earnings per share growth will also be driven by Broadcom’s share repurchase programs, which the company can easily finance, thanks to massive cash flows.

Valuation, Dividends, And Expected Returns

Broadcom will earn close to $20 per share during the current year, shares therefore are trading at ~10.5 times this year’s earnings right now. Compared to how Broadcom’s shares were valued in the past, this provides a hefty discount.

The fair valuation is a PE ratio of 13-14. If Broadcom’s valuation normalizes towards the historic median over the coming five years, shares would see a ~5% annual tailwind from multiple expansion.

On top of its share repurchases Broadcom also returns cash to its owners via dividend payments. Broadcom’s dividend yields 3.3% right now, which is quite high for a tech company. Broadcom has raised its dividend at a double-digit pace over the last couple of years.

Through earnings per share growth of ~10%, multiple expansion of ~5%, and its dividend yielding more than 3%, Broadcom should be able to generate high-teens total return annually over the coming five years.

Final Thoughts

Broadcom combines a relatively high dividend yield, a low valuation with sizeable upside towards fair value, and a compelling earnings growth outlook. These factors should allow for attractive total returns over the coming five years.

Since shares are very inexpensive the downside seems limited, which, combined with the strong total return outlook, makes Broadcom one of the most attractive Nasdaq 100 stocks.