The fourth quarter earnings season has been strong for semiconductor stocks, as Wall Street rewards many for a return to growth and solid guidance. So let’s take a look a why Broadcom Inc. AVGO appears to be a chip stock worth buying for its dividend and growth potential, with its earnings in sight.
What’s the Story?
The historically cyclical semiconductor space is coming off a rough year, with overall sales down 12% in 2019, according to the Semiconductor Industry Association. Despite the decline, semiconductor stocks thrived, driven by the likes of AMD AMD and other high-flyers, as Wall Street bought up beaten down chip stocks in early 2019 in anticipation of a return to growth.
Many semiconductor companies have recently reported strong quarters, which includes industry powers Samsung, Intel INTC, and Taiwan Semiconductor Manufacturing Co. TSM. On Thursday, Nvidia NVDA topped our Q4 earnings and revenue estimates on data center growth.
Plus, the overall earnings season has been strong, driven by giants such as Apple AAPL and Microsoft MFST. And despite the continued spread of the coronavirus in China, all three major U.S. indexes rest near their new highs.
As far as Broadcom is concerned, the firm already posted stronger-than-projected Q4 2019 results in December. Investors should note that the firm has expanded into infrastructure software solutions through acquisitions. This includes its roughly $19 billion purchase of CA Technologies and more recently the acquisition of Symantec’s enterprise software unit.
Broadcom’s Q4 revenue popped 6%, with fiscal 2019 sales up 8%. CEO Hock Tan also said that its core semiconductor business was bottoming out and he expects the unit to return to growth in the second half fiscal 2020. The company also achieved record profitability in fiscal 2019, which included free cash flow of over $9 billion.
Broadcom’s record profitability came despite a “challenging market backdrop” for its semiconductor solutions segment. And the company’s strength helped management raise its dividend by 23% to $3.25 a share, per quarter for fiscal 2020.
AVGO’s dividend currently yields a solid 4.01%. This crushes the 10-year U.S. Treasury’s 1.58%, Cisco’s CSCO 2.96%, and Texas Instruments’ TXN 2.71%. “Looking ahead to next year, we expect our adjusted EBITDA to expand by more than $1 billion, while we focus our capital returns on cash dividends, with excess cash going towards debt pay down,” CFO Tom Krause said in prepared remarks.
Broadcom shares have soared over the last decade. More recently, AVGO stock is up 16% since September. AVGO also trades at a discount compared to its industry at 13.9X forward earnings estimates, against its industry’s 22.8X average. And its Electronics – Semiconductors space rests in the top 7% of our more than 250 Zacks industries.
Our Zacks estimates call for Broadcom’s Q1 fiscal 2020 revenue to pop 2.4% to $5.93 billion, with its adjusted earnings excepted to slip 6% to $5.22 a share. Both of these estimates mark a downturn compared to the fourth quarter.
On the positive side, AVGO’s full-year 2020 revenue is projected to jump 10.7% to $25.02 billion, which would top last year’s 8% sales expansion.
Meanwhile, Broadcom’s adjusted earnings are expected to climb 8.8% in 2020. Then, AVGO’s adjusted 2021 EPS figure is set to pop another 10% higher on nearly 6% stronger sales.
Broadcom’s positive earnings revisions activity (chart above) helps AVGO earn a Zacks Rank #2 (Buy) at the moment. The semiconductor firm also provides solid income, value, and exposure to growth within a strong industry.
Peeking ahead, AVGO is set to release its Q1 fiscal 2020 financial results on Thursday, March 12.
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