Rabu, 30 November 2022

Can This Chipmaker Sustain Its Dividend?

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Can This Chipmaker Sustain Its Dividend?

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

With supply constraints and myriad other issues, semiconductor stocks have had a rough go of it in 2022.

But many of the companies still generate gobs of cash flow, which should continue in the foreseeable future.

Broadcom (Nasdaq: AVGO) provides semiconductors, fiber optics and software to a wide variety of industries. The San Jose, California-based company pays a 3.2% dividend yield. But with the recent struggles in the industry, can Broadcom shareholders rely on the dividend?

Broadcom's free cash flow growth is impressive, and that is expected to continue as free cash flow is forecast to rise 26% this year and another 7% next year.

Chart: Broadcom's Free Cash Flow
 

Meanwhile, the tech giant is projected to pay out just $6.6 billion in dividends this year and $7.5 billion next year, for very comfortable payout ratios of just 39% and 41%, respectively.

Broadcom currently pays a quarterly dividend of $4.10 per share, which comes out to a 3.2% yield. It has raised its dividend every year since 2011.

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Considering Broadcom is growing its free cash flow, has a low payout ratio and has an admirable dividend-raising track record, the dividend is quite safe.

Dividend Safety Rating: A

Dividend Grade Guide
 

I was recently asked how safe a company's bonds are compared with its dividend payments. A bond payment has priority over a dividend. So a company will always make sure its bond payments are covered before declaring a dividend.

If a company is making any dividend payments - even if it cut the dividend - that means its bonds are in good shape. Otherwise, the company would conserve cash and eliminate the dividend if it needed to pay bond interest. When a company's dividend is safe - like in Broadcom's case - then you know that its bonds are rock-solid.

I've actually never lost money from investing in bonds. And if that's not as much of a sure thing as you can expect in this world, then I don't know what is.

You can learn how to follow my bond recommendations when you check out my presentation here.

Good investing,

Marc

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