Broadcom Ltd. (AVGO), one of the most high-profile large-cap chip stocks has been on a tear over the past month following a period of underperformance. The shares were badly pummeled during its failed bid for Qualcomm Inc. (QCOM).
Now, the semiconductor stock is to poised for a rebound that could push up its shares by more than 20% as it boosts stock buybacks and dividends and benefits from a major acquisition, according to a detailed story in Barron's.
Broadcom's Stock Is Taking Off
|Stock/Index||Performance - 12 Months||Performance - Since July 15|
Hefty Free Cash Flow Set for Buybacks, Dividends
Shares of the San Jose, Calif.-based maker of chips and electronic products are down about 3.6% year-to-date (YTD) through Wednesday afternoon. Meanwhile, the broader S&P 500 Index has returned 9.3%.
Thanks to solid demand for its high-margin products used in smartphones, data centers and factories, Barron's Jack Hough expects Broadcom's "hefty free cash flow" to be utilized for dividends and share repurchases. He expects the company's 2.9% dividend yield, based on $7 per share in annual dividends paid quarterly, to jump to $11 a share within two years, reflecting a yield of 4.6% based on the stock's recent price.
In light of its high dividend, Hough notes that investors are paying just 11 times earnings for Broadcom stock, compared to the 14 times earnings that investors pay for consumer giant General Mills Inc. (GIS), with a 4.5% dividend yield. Barron's expects Broadcom's recently announced $19 billion acquisition of CA Technologies (CA) to help the firm find new ways to sell its existing products, boosting its stock to trade at its historical average around 13 times earnings. (For more, see also: Why Broadcom Will Make $10 on Every iPhone: JPM.)
CA Deal to Offer Cross Selling Opportunity
Key obstacles for Broadcom include weak demand from hard drive controllers and set-top boxes, which are losing ground to flash storage and cable cord cutting, as noted by Barron's. However, Hough expects business from higher bandwidth smartphones and hyperscale data centers to counter the negative headwinds, helping Broadcom sustain its gross profit of roughly 66 cents per sales dollar, versus the roughly 38 cents generated by Apple Inc. (AAPL), a main customer.
Bears have also warned on Broadcom's CA deal, skeptical over taking on a software company which focuses on customers with on-site data centers when the general trend is towards public cloud computing. Hough cites Nomura Instinet's Romit Shah as one analyst who initially took the more downbeat outlook on the deal's announcement in July and later upgraded Broadcom to buy thanks to solid earnings posted in September and a new perspective on the CA announcement. Shah now views the tie up as a strategic move for Broadcom to cross-sell networking products to mainframe customers transitioning to a hybrid cloud model. (For more, see also: 8 Stocks to Thrive as 2018 Cloud Spending Soars.)
Nomura's $300 a share price target implies 21% upside from Wednesday's close.