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Should You Buy iPhone Supplier Broadcom After Its 149.4% Share Rise?

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Today, I want to help you figure this out by answering – Should You Buy iPhone Supplier Broadcom And Its 3% Dividend?

Broadcom (AVGO) is a hardware company that provides parts for phones like the Apple iPhone and the Samsung Galaxy smartphones.

It also provides chips for things like TV’s, Wi-Fi, Bluetooth and more.

In other words, if you own any of these kinds of devices, its likely you use Broadcom products every day without even knowing it.

The dominant product lines its parts are in helped Broadcom not only survive during the Covid pandemic… But also thrive.

From March 23rd to today, its share price is up 149.4% due to its enormous power and competitive advantages.

This while most companies on Earth struggled, closed, or even went bankrupt.

But this is in the past and it doesn’t help us figure out if it’s a great buy now… 

That’s what I want to help you figure out today.

It’s based in San Jose California.  It has a $197 billion market cap. And it pays a 3% dividend… Which is reason #1 to consider buying its stock.

Broadcom’s 3% Dividend

Over the last decade Broadcom’s paid out a total of $41.01 per share in dividends.

At today’s share count of 423 million shares that’s equal to $17.35 billion paid out to shareholders in that time.

It also grew its dividend 3,714% from $0.35 per share in 2011 to $13.35 per share now.  That’s not a typo.

These dividend payments will help you in normal times earn cash if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

The regular payments will help you earn more money for your retirement.  And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns gigantic profits.  Which is reason #2 to consider Broadcom for your retirement portfolio.

Broadcom Earns Gigantic Profits

Over the last decade it earned an average operating income margin of 19.3% per year.

I look for anything above 10% on a consistent basis so this is great.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 28.9% per year on average.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

These are both well above the minimum thresholds I look for which make Broadcom one of the best operating businesses on Earth.

This already adds a large margin of safety to investing in Broadcom… Another thing the high profits do is that they allow it to have reasonable debt levels.

Broadcom Has Decent Debt Levels

As of this writing AVGO has $9.55 billion in cash compared to $41.93 billion in debt.

As a percentage of its balance sheet total liabilities make up 68.8%. 

Debt makes up 21.3% of its market cap.

And its debt-to-equity ratio is 1.71.

A bit of a mixed bag here.

Three of the four metrics are above what I look for when considering an investment… Meaning Broadcom on these metrics has more debt than I like.

As one example, I want debt to equity ratios to be below 1.

But when comparing debt to market cap it only makes up 21.3% which is below what I look for.

What does this mean for the evaluation?

I dislike high debt levels because I’m an extremely conservative investor… Most of the time this would disqualify Broadcom for me.

However, due to its world class profits and cash flows it can have more debt without it becoming an issue.

In other words, it’s still a concern and something to watch.  But not a deal breaker for Broadcom.

So far, Broadcom looks like a great potential stock to buy… But what about its valuation? Is it cheap enough to buy?

Broadcom IS NOT Cheap…

With the markets at or near all-time highs you’d expect a fantastic stock like Broadcom to be selling at an enormous valuation.

Unfortunately, it is…

As of this writing its P/E is 55.8.

Its P/CF is 15.9.

Its forward P/E is 17.9.

And its enterprise value to operating income – EV/EBIT is 42.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These metrics show that Broadcom is massively overvalued right now when you consider them together.

And this means owning its stock does not give you a large margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With Broadcom being overvalued right now, its stock does not offer you a large margin of safety… And for this reason, I recommend you avoid buying it for now.

Conclusion

If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – consider investing in Broadcom. But only when its cheaper.

Also consider some of the other investments below.

Disclosure – Jason Rivera is a 14+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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