Broadcom Inc. (NASDAQ:AVGO) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 21st of September will not receive this dividend, which will be paid on the 30th of September.
Broadcom's next dividend payment will be US$3.25 per share, on the back of last year when the company paid a total of US$13.00 to shareholders. Calculating the last year's worth of payments shows that Broadcom has a trailing yield of 3.5% on the current share price of $366.91. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. An unusually high payout ratio of 233% of its profit suggests something is happening other than the usual distribution of profits to shareholders. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. It distributed 48% of its free cash flow as dividends, a comfortable payout level for most companies.
It's good to see that while Broadcom's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Broadcom's earnings have been skyrocketing, up 35% per annum for the past five years.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Broadcom has delivered an average of 47% per year annual increase in its dividend, based on the past 10 years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Is Broadcom an attractive dividend stock, or better left on the shelf? Earnings per share have been rising nicely although, even though its cashflow payout ratio is low, we question why Broadcom is paying out so much of its profit. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Broadcom's dividend merits.
While it's tempting to invest in Broadcom for the dividends alone, you should always be mindful of the risks involved. We've identified 3 warning signs with Broadcom (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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