Broadcom (NASDAQ:AVGO) has long been a top smartphone chip supplier but it is rapidly transforming into a premier artificial intelligence chipmaker. While Nvidia (NASDAQ:NVDA) is currently the face of the AI revolution, Broadcom is growing its AI chip business so fast that it may soon rival Nvidia as the go-to AI stock for investors.
What many people might not realize, though, is the chipmaker is also a dividend powerhouse. It paid its first dividend in 2010 and has consistently grown the payout every year afterward. Its most recent quarterly payment was $5.25 per share, which yields 1.7% annually.
That will be reduced going forward to reflect the 10-for-1 stock split AVGO effected in July, but it doesn’t change anything about Broadcom’s business or its dividend. Yet the chipmaker’s stock sports a seemingly pricey market multiple of 67 times earnings. Income investors will want to know if it is priced for perfection or is there more room to run.
With Broadcom scheduled to report earnings on Sept. 5, let’s see if AVGO should be the tech dividend stock you must have in your portfolio.
Key Points About This Article:
- Broadcom remains a top-tier smartphone chip supplier, but the growth of data center demand for AI chips has given the semiconductor stock a new, bigger avenue for growth.
- The company has paid a dividend since 2010 and has grown the payout every year afterward. With a low payout ratio, the dividend is both secure and has plenty of room for future increases.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
Wireless Chips Remain a Key Revenue Driver
Broadcom is one of the leading mobile chipset makers and counts both Apple (NASDAQ:AAPL) and Samsung as two core customers. The former accounted for 20% of the semiconductor company’s revenue last year, or about $7.1 billion, when it signed a multi-billion-dollar long-term contract with Apple to supply it with chips.
It fully expects to have such significant customer concentration for the foreseeable future, which introduces some risk in the event Apple changes suppliers or continues developing chips in-house that eventually replace Broadcom’s offerings. But because Broadcom makes such particular, high-powered chipsets, its position is secure for now.
For example, AVGO makes specialized thin-film bulk acoustic resonators (FBAR) filters that it exclusively sells to Apple for the iPhone. Through its proprietary processes, Broadcom’s FBAR filters allow mobile handsets to function more efficiently in a market where the radio frequency (RF) spectrum has become congested.
More than three-quarters of Broadcom’s annual revenue comes from its semiconductor solutions segment, of which wireless revenue represents 22% of that amount. Last year the segment saw a 9% increase in sales. It’s up less than 5% year-to-date, but it is a seasonal business that should experience much greater growth in the back half of the year.
Data Centers Are the New Growth Channel
While wireless has been Broadcom’s mainstay, more recently it turned its attention to data centers, which are experiencing tremendous growth. AI has been the driving force behind the industry’s growing demand and Broadcom’s networking, Ethernet switches, and routing silicon solutions have found a receptive outlet.
The semiconductor stock’s custom AI accelerators and merchant networking chips contributed to a 35% increase in AI chip sales last quarter. Management forecasts AI chips will bring in $11 billion in sales this year, or 25% of total sales, a big step up from the 15% they represented last year.
The growth allowed Broadcom to also increase its full-year revenue guidance to $51 billion, a $1 billion increase from its prior forecast and almost wholly due to artificial intelligence. In fact, non-AI chip sales are falling, down 30% year-over-year in the second quarter.
A Dividend Tech Stock Still Worth Buying
Broadcom is still far behind Nvidia in AI revenue. The fiscal second-quarter results Nvidia just produced the other day showed a 122% surge in sales to $30 billion, or almost three times what Broadcom is forecasting for the full year AI sales. But Nvidia’s rate of growth is slowing.
The chipmaker forecast $32 billion in fiscal third-quarter revenue, which is a 79% increase. That is obviously a sequential deceleration, but it also represents a decline from the doubling in sales Nvidia achieved last year.
Broadcom’s revenue, on the other hand, is accelerating. Second-quarter revenue grew 43%, up sequentially from 34% growth and well-ahead of the 8% rise last year. Wall Street is looking for the chipmaker to grow revenue 51% in the third quarter to $14 billion. It is quite possible Broadcom will exceed those estimates.
Because Broadcom is firing on all cylinders, the business is growing fast enough to warrant the premium AVGO charges for the stock. Taken together, AVGO stock is absolutely a need-to-own tech dividend stock.
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