Broadcom’s dividend growth is impressive.
And regular readers know I’ve always been big on dividends.
Broadcom has raised dividends year after year
Now, over the past eight years, Broadcom has consistently raised dividends, with an eight-year compounded annual growth rate of 34.7%. Last quarter, it announced an 11% quarterly dividend raise, bringing dividend payout in 2024 to $2.105 per share. This far beats even Singapore banks’ dividends.
Put it this way, buying Broadcom shares just a decade ago would have rewarded shareholders with a monster dividend of 19.6% yield on an initial cost if you’d bought shares in 2015.
What’s more, management has said it will further raise its dividends to $2.36 per share in 2025.
The question is, can Broadcom continue its outstanding dividend growth performance?
What is Broadcom?
With its newly-minted $1 trillion market cap, Broadcom is one of the biggest tech giants in the semiconductor industry. It was founded in 1991, after a spin off from Hewlett Packard to become Avago Technologies. Its CEO, Hock Tan is a shrewd dealmaker.
In 2009, Avago Technologies went public. Then the company aggressively expanded, buying companies like LSI Corporation ($6.6 billion) and Emulex ($606 million).
Later on, Avago bought over Broadcom Corporation for $37 billion and rebranded itself as Broadcom Inc, creating one of the most powerful chipmakers in the world.
By the way, this merger resulted in changes to the company’s financial reporting structure.
Hock Tan has turned Avago from an “under-the-radar” business division in Hewlett Packard, executed a series of high-profile acquisitions and turned it into a niche, high moat software business.
Over the past ten years, Broadcom averaged a 14% net profit margin. If my reading is correct, this is higher than average chipmakers. I’ve come to believe that companies that can sustain a higher profit margin in a highly fragmented industry commands certain pricing power.
Broadcom further strengthened its cybersecurity portfolio by buying over Symantec’s enterprise security business for $10 billion.
In 2023, Broadcom bought VMware, its largest-ever deal, for $69 billion, further diversifying into cloud computing and “virtual reality” software.
It’s worth noting that most of Broadcom’s revenues came from making networking chips and wireless components for other tech giants like Apple, Google and Cisco. It also offers solutions in cybersecurity and mainframe software, selling to key government and large enterprises.
What’s driving Broadcom’s strong shares performance?
Shares of Broadcom have been soaring, given its key role in the AI revolution. In fact, shares have returned 1,959% over the past ten years. This makes it one of the most important companies in the industry today.
What’s driving Broadcom’s strong shares performance and dividend growth is its cash flow machine.
Put it this way, its free cash flow grew from $1.7 billion in 2016 to $19 billion in 2024. This creates a free cash flow margin of 40%. And yes, this is actually close to Nvidia’s free cash flow margins of ~50%.
Broadcom’s growing dividends is the result of its gushing free cash flow.
Management has said it will pay out half of its cash flow as dividends. Meanwhile it will reinvest its excess cash into expansion and shares buyback.
But I’m actually more persuaded by this.
You see, chipmakers tend to be highly capital intensive and require large amounts of debt to expand.
Even after it bought VMware, Broadcom’s balance sheet remains sound. Broadcom has around $66 billion of debt, yet its operating income can cover more than interest expense.
So far, its debt repayment ratio has improved and went above 3.0x over the last couple of years.
Is Broadcom’s growing dividends sustainable?
The big problem? Broadcom is in a cyclical industry. If semiconductors goes into a downturn, it could impact Broadcom’s ability to raise dividends aggressively. And may be a tell tale sign to sell its stock.
Another big risk is Apple accounts for a large portion of Broadcom’s wireless revenues. If Apple decides to cut Broadcom out, this could impact profits and ultimately dividends.
Now, to determine whether Broadcom can continue its high dividend growth, let’s do some quick math…
- If Broadcom maintains a 25% dividend growth per year (it achieved 34% growth over past eight years) over the next ten years, its annual dividend would reach $19.60 per share then.
- Based on today’s $221 per share price, that would grow close to 9% dividend yield.
- Growing its dividends at 25% a year looks aggressive, but I’m persuaded that Broadcom’s free cash flow has been impressive.
With strong free cash flow, a dominant position in AI and networking, and a disciplined capital allocation strategy, Broadcom seems well-positioned to sustain double-digit dividend growth for years to come.
My final thoughts
I admit, Broadcom’s dividend yield is low today. But what we’re betting on is an organic growth in dividends. Think about this. Broadcom is able to grow its dividends to 19% yield on an initial cost back in 2015. That says something about its economic moat.
So… is it too late to pick Broadcom up for dividends?
Well, if Broadcom maintains its “moaty” businesses, there’s a strong case it could continue compounding dividends at a double-digit pace, which could continue growing its dividends beyond a high double digit dividend yield.
I might say for new investors looking to invest for dividends, the starting yield of a company may seem low, but I’d focus on a company’s growth trajectory over the long term.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
