Broadcom: Profitable Growth at a Reasonable Price

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2022 has been a challenging year for many equity inventors. A combination of rising inflation, tightening monetary conditions and geopolitical crises have driven increased volatility. Growth stocks—in particular unprofitable technology names—have been among the market's weakest performers. As rates and monetary policy normalize, however, technology names with reputations for profitability, quality and attractive growth potential could be compelling.
 
  • Against a backdrop of a less accommodative Federal Reserve, technology investors seeking profitable growth at reasonable valuations may be attracted to the S&P Technology Dividend Aristocrats.
  • With its attractive growth runway and general reputation for quality, a Technology Dividend Aristocrat like Broadcom (Nasdaq: AVGO) may be a more compelling opportunity than the “growth at any price” technology names.

Attractive Growth with Strong Fundamentals

Broadcom is a global technology leader with a long heritage of innovation designing and developing semiconductors and infrastructure software solutions. Broadcom sells products into several large and still growing end markets, including mobile phones and Bluetooth-capable devices, high-growth industrial applications like factory automation, renewable energy, and automotive sensors. In its current form, the company is also the result of several acquisitions over the years, including the 2019 acquisition of enterprise security company Symantec.
 
Broadcom’s recent financial results have been notable.
 
  • Net revenue has grown from $13 billion in 2016 to over $27 billion in 2021, a compound annual growth rate of nearly 16%.
  • With margins currently over 54%, recent revenue growth has translated into high levels of profitability and cash flow—EBITDA1 has approximately quadrupled to nearly $15 billion since 2016.
Dividend investors may take particular interest in the company’s free cash flow growth, up from approximately $2.7 billion in 2016 to over $13 billion in 2021. That’s a compound annual growth rate of almost 38%. This prodigious free cash flow growth has translated to surprising levels of dividend growth.
 
  • Broadcom has raised its dividend every year since it first started paying one ($0.35 per share in 2011).
  • Broadcom’s per-share distribution in 2021 was $14.40, which represents a compound growth rate of 45%.
  • With a free cash flow payout ratio of approximately 45%, we believe plenty of headroom remains to continue growing the dividend while reinvesting for growth.  

Broadcom by the Numbers

broadcom_virtuous_cycle.jpg
Source: FactSet. Data from 10/31/2016 to 10/31/2021.
Currently, Broadcom trades for approximately 16 times the next 12 months’ earnings, which compares favorably to the S&P 500 Information Technology sector’s forward multiple of 24.6 times, as of 5/5/22.2
 

The Takeaway

The S&P Technology Dividend Aristocrats are well-established technology companies that have grown their dividends for at least seven consecutive years. They generally have a history of profitability, with attractive growth trajectories, and reasonable price valuations. Broadcom is one such company. Historically, strong profits and cash flows coupled with a favorable growth runway and valuation make Broadcom a compelling example of what it means to be an S&P® Technology Dividend Aristocrat®.

Explore more of the elite companies of the Dividend Aristocrats with the ProShares Technology Dividend Aristocrats ETF (Cboe: TDV).
 
1EBITDA – earnings before interest, taxes, depreciation and amortization.
2P/E is the current price of Broadcom to 12-month projected earnings. This is not a forecast of the fund’s future.
 

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TDV

S&P Technology Dividend Aristocrats ETF

Seeks investment results, before fees and expenses, that track the performance of the S&P® Technology Dividend Aristocrats® Index.

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Sources: FactSet, ProShares. Broadcom fiscal year-end data as of October 2021.

As of 5/17/22, TDV included a 2.66% allocation to Broadcom. Holdings are subject to change.

This is not intended to be investment advice. Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The performance quoted represents past performance and does not guarantee future results. Index information does not reflect any management fees, transaction costs or expenses. Indexes are unmanaged, and one cannot invest directly in an index.

There is no guarantee any ProShares ETF will achieve its investment objective.

Shares of any ETF are generally bought and sold at market price (not NAV) and are not individually redeemed from the fund. Your brokerage commissions will reduce returns.

Investing involves risk, including the possible loss of principal. This ProShares ETF is non-diversified and entails certain risks, including imperfect benchmark correlation and market price variance, that may decrease performance. Please see their summary and full prospectuses for a more complete description of risks.

Technology companies may be subject to intense competition, product obsolescence, general economic conditions and government regulation and may have limited product lines, markets, financial resources or personnel.

Investments in smaller companies typically exhibit higher volatility. Small- and mid-cap companies may have limited product lines or resources, may be dependent upon a particular market niche and may have greater fluctuations in price than the stocks of larger companies. Small- and mid-cap companies may lack the financial and personnel resources to handle economic or industry-wide setbacks and, as a result, such setbacks could have a greater effect on small- and mid-cap security prices.

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