Broadcom Inc. (NASDAQ:AVGO) is about to trade ex-dividend in the next 2 days. If you purchase the stock on or after the 20th of March, you won't be eligible to receive this dividend, when it is paid on the 31st of March.
Broadcom's next dividend payment will be US$3.25 per share, and in the last 12 months, the company paid a total of US$13.00 per share. Based on the last year's worth of payments, Broadcom stock has a trailing yield of around 6.9% on the current share price of $187.58. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Broadcom distributed an unsustainably high 185% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether Broadcom generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 48% of the free cash flow it generated, which is a comfortable payout ratio.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Broadcom fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's comforting to see Broadcom's earnings have been skyrocketing, up 39% per annum for the past five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the past nine years, Broadcom has increased its dividend at approximately 53% a year on average. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
To Sum It Up
Is Broadcom worth buying for its dividend? It's good to see earnings per share growing and low cashflow payout ratio, although we're uncomfortable with Broadcom's paying out such a high percentage of its profit. All things considered, we are not particularly enthused about Broadcom from a dividend perspective.
While it's tempting to invest in Broadcom for the dividends alone, you should always be mindful of the risks involved. We've identified 4 warning signs with Broadcom (at least 1 which is significant), and understanding them should be part of your investment process.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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