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In this video, we perform a deep dive on Broadcom’s dividend safety. To begin, let’s talk about Broadcom’s business model. Broadcom designs, develops and sells semiconductors under the following business units: wired infrastructure, wireless communication, enterprise storage and industrial. Its offerings include data center chips, factory automation, energy systems and power generation, broadband access, and home connectivity. It is a fabless semiconductor company, which means that the products it designs are manufactured by other companies (so called foundries). Broadcom has recently re-domiciled to the US and is now headquartered in San Jose, CA. The company was founded in 1961 and currently trades with a market capitalization of $106 billion. Broadcom’s 8-year track record of rapidly rising dividend payouts has given it a reputation as a reliable dividend grower. With two more years of consecutive dividend increases, the company will become a Dividend Achiever, an exclusive group of dividend stocks with 10+ years of consecutive dividend increases. You can download our free list of Dividend Achievers here: https://www.suredividend.com/dividend-achievers-list/ For the remainder of this video, we will discuss the company’s current dividend safety from four perspectives: 1. it’s dividend safety in the context of its current earnings 2. its dividend safety in the context of its current free cash flow 3. its dividend safety in the context of its recession performance 4. its dividend safety in the context of its current debt load Broadcom’s Dividend Safety Relative to Earnings When Broadcom announced its fourth quarter financial results on December 6th, the company reported that it generated earnings-per-share of $20.82 for the fiscal year 2018. For context, Broadcom paid $10.60 of common share dividends during the same time period for a dividend payout ratio of 51%. Using earnings, Broadcom’s dividend appears very safe for the foreseeable future. Broadcom’s Dividend Safety Relative to Free Cash Flow Many analysts believe that comparing a company’s dividend payments to its free cash flow is a better method for assessing dividend safety. Accordingly, we will now compare Broadcom’s current dividend payment to its free cash flow. During fiscal 2018, Broadcom generated $8.88 billion of cash from operating activities and spent $635 million on capital expenditures for free cash flow of $8.25 billion. The company distributed $3 billion of common share dividends during the same time period for a free cash flow dividend payout ratio of 36%. Using free cash flow, our conclusion is the same as when we used earnings to Broadcom’s dividend safety. The company’s dividend appears safe for the foreseeable future. Broadcom’s Dividend Safety Relative to Recession Performance Companies do not cut their dividends in the good times. Instead, dividends are reduced when companies experience financial difficulties. Accordingly, this section will analyze Broadcom’s current dividend safety in the context of the company’s historical recession performance. We believe that the best way to measure a company’s recession resiliency is by measuring its earnings-per-share performance during the financial crisis that occurred between 2007 and 2009. Broadcom’s performance during this time period is shown here: • 2007 adjusted earnings-per-share: -$0.74 • 2008 adjusted earnings-per-share: $0.38 • 2009 adjusted earnings-per-share: -$0.20 • 2010 adjusted earnings-per-share: $1.81 • 2011 adjusted earnings-per-share: $2.28 • 2012 adjusted earnings-per-share: $2.77 Broadcom’s earnings-per-share declined into losses during the last recession. Fortunately, the company was not paying out a dividend during this period so it didn’t have to worry about covering it. However, if this happened today, it would have a difficult time sustaining its dividend. Thus, while the payout ratio is fairly low relative to current earnings, if the company generates losses in a future recession its dividend could very well be at risk. Broadcom’s Dividend Safety Relative to Its Current Debt Load The last angle that we will use to assess Broadcom’s current dividend safety is by looking at the company’s current debt level. More specifically, we will see how much the company’s weighted average interest rate will need to increase before the company’s free cash flow will no longer cover its dividend payment. During fiscal 2018, Broadcom generated $628 million of interest expense and had $17.5 billion of debt outstanding for a weighted average interest rate of 3.6%. As the image in the video shows, Broadcom’s weighted average interest rate would need to rise above the 33% level before its dividend would no longer be covered by free cash flow. Accordingly, we believe that Broadcom’s debt level is unlikely to impact the safety of its dividend moving forward.
