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Why You Should Love This Apple Supplier's Dividend

By Ashraf Eassa – Dec 1, 2018 at 1:00PM

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It's big and it's growing.

Chip giant Broadcom (AVGO -1.27%) -- which generated more than 20% of its revenue from sales of chips to Apple in its fiscal 2017 -- has a great capital return program. 

On the company's most recent earnings call, CFO Tom Krause told investors that it was "committed to our policy of distributing 50% of our prior fiscal year free cash flow to to shareholders in the form of dividends." 

A chip embedded on a board.

Image source: Getty Images.

With the rest of the free cash flow, Krause said the following:

One, we plan to continue to buy back shares. We currently have $6.3 billion left in our $12 billion stock repurchase authorization that extends through the end of FY19. And two, with the focus on maintaining our investment grade credit rating, we believe we also have the cash flow and the borrowing capacity to continue to expand our earnings base through strategic and accretive acquisitions.

If you're an income-oriented investor, you should love this capital allocation policy. Here's why.

Broadcom generates a lot of free cash flow

It's great that Broadcom intends to give back half of its free cash flow to shareholders in the form of a dividend, but what's even nicer is that the company generates a lot of free cash flow.

AVGO Free Cash Flow Per Share (TTM) Chart

AVGO Free Cash Flow Per Share (TTM) data by YCharts.

As you can see in the chart above, Broadcom's free cash flow per share has grown significantly over the last several years. Over the last 12 months, the company's free cash flow per share has hit a whopping $17.25. 

On an annualized basis, the current dividend is $7.00 per share, or a little less than 41% of the free cash flow that it's generated over the last 12 months. At the current share price, this translates into a generous dividend yield of just over 3%. 

It's also worth noting that Krause told investors that "given our fourth quarter outlook and expected full fiscal year [2018] results, we anticipate another substantial increase in the quarterly dividend for calendar 2019." 

After that "substantial increase" -- assuming that the share price stays where it is today -- Broadcom's dividend yield is set to become even more generous.

Dividend growth may take a breather in 2020

Although Broadcom's dividend looks set to rise significantly for calendar year 2019, that dividend growth could be set to take a breather in the following year. Indeed, while Broadcom is expected to see its non-GAAP earnings per share (EPS) grow from $16.01 in fiscal 2017 to $20.51 in fiscal 2018, which translates into more than 28% growth, that growth is set to slow substantially in fiscal 2019 to a bit under 6.7%. 

With that said, I do expect Broadcom to grow its dividend again in 2020, but since the company's earnings growth looks set to take a breather, it's probably best to expect significantly slower dividend growth in 2020 than what we'll likely see in 2019. 

Nevertheless, Broadcom's dividend policy is clearly quite generous today and ultimately allows its shareholders to -- irrespective of the gyrations in the stock price -- share in the company's success. 

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.

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