Buy Surging Chip Stock Broadcom (AVGO) for Its Dividend Yield and More?

From Salesforce CRM to Nvidia NVDA, technology companies have proven their ability to grow during the pandemic-induced downturn. Broadcom AVGO is no exception and its shares have outpaced the broader semiconductor industry since the market’s March lows.

The firm is set to release its third quarter fiscal 2020 financial results on Thursday, September 3, which could be the next catalyst for the tech stock that also provides investors with a solid dividend yield.

Broadcom’s Pitch

Broadcom’s semiconductor offerings are utilized within smartphones, data centers, networking equipment, and elsewhere. AVGO has also expanded its reach into infrastructure software solutions through acquisitions. This includes its purchase of CA Technologies that it completed in November 2018.

The firm then acquired Symantec’s enterprise security business last November, in a move that Broadcom’s CEO Hock Tan said helped bolster its “footprint of mission critical infrastructure software.”

Investors should note that Broadcom is an Apple AAPL supplier and in early June it alluded that its next generation iPhone would be delayed. Apple has since noted that the release of its upcoming flagship smartphone will be pushed back by a few weeks due to coronavirus-related setbacks.

Nonetheless, AVGO posted better-than-expected second quarter results in early June, with revenue up 4% for the period ended in early May. Broadcom also generated record quarterly free cash flow of over $3 billion. “Looking ahead, our third quarter guidance for semiconductors reflects a surge in demand from cloud, telecom and enterprise customers, offset by supply chain constraints and an expected substantial reset in wireless,” Broadcom’s chief executive said in prepared remarks last quarter.

What Else…

Despite outpacing the Semiconductor market since the market’s lows, up 75% against 56%, AVGO shares have lagged the industry during the past 12 months. This trend stretched back over the last five years, as the nearby chart showcases. But past performance is no indication of what’s to come.

Luckily, AVGO’s dividend helps make up for its underperformance against its industry. Broadcom in December 2019 raised its dividend by 23% to $3.25 per share. AVGO’s current dividend yield comes in at 3.82% to help it crush Intel’s INTC 2.62%, other large-cap tech names, and the S&P 500’s 1.64% average. Plus, its payout isn’t artificially boosted by a falling stock price.

In fact, Broadcom hit new highs again on Friday and has now surged 10% in the last month. This might mean that investors are expecting big things from its upcoming Q3 results.

Our current Zacks estimates call for Broadcom’s adjusted quarterly earnings to pop 1.4% to $5.23 per share on roughly 5% stronger sales that would see it hit $5.78 billion. The company’s fourth quarter FY20 outlook appears even better, with its EPS figure expected to jump 9% on 8% revenue growth. And its fiscal 2021 projections call for further expansion.  

Bottom Line

AVGO is currently a Zacks Rank #3 (Hold) that sports a “B” grade for Growth in our Style Scores system and is part of a space that rests in the top 25% of our more than 250 Zacks industries. And it’s likely prudent to wait until after Broadcom reports for its updated outlook, even though earnings releases have helped boost high flying tech stocks recently.

That said, investors with a longer-term horizon don’t need to time things perfectly and its dividend is enticing.  

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