Broadcom Finishes Its 2019 Fiscal Year Strong and Remains a Top Dividend Stock

Semiconductor giant Broadcom (AVGO 2.99%) has been unstoppable this year. Coming off a flat performance in 2018, the stock is up 30% with just weeks left in 2019. The Brocade and CA Technologies software acquisitions from the last two years helped offset losses in the core chip business and fueled the company's transition to a vertically integrated provider of networking technology.

Investors should be optimistic: The fourth-quarter report card was solid, and the initial outlook for 2020 was good, too. With some of the headwinds from the last couple of years possibly coming to an end -- an easing in the U.S.-China trade war and a general pickup in business spending and global economic activity -- Broadcom remains a top tech dividend stock.

2019 is a wrap

Broadcom's bread and butter, semiconductors, fell 5% in Q4 and 8% on the year. But that was more than offset by infrastructure software, including sales from the CA Technologies takeover in 2018. In total, Q4 sales were up 6%, and free cash flow (money left after cash operating and capital expenses are paid for) fell 6%.  

Pp = percentage point. Data source: Broadcom.  

When setting aside the benefits of Broadcom's latest takeovers, the core semiconductor business did manage a 5% sequential increase from Q3. Though some of that is seasonal demand from end manufacturers, it offers a glimmer of hope that the chipmaking industry is on the mend.

Management's rosy outlook for 2020 would seem to second that. Revenue should be $25 billion, plus or minus $500 million, good for an 11% increase over 2019 at the midpoint. Even when backing out the expected $1.8 billion in revenue contribution from the recently acquired Symantec enterprise security segment, it still implies about a 3% increase in the top line.  

Even better was 2020 adjusted EBITDA guidance of $13.75 billion (plus or minus $250 million), a 9% increase over the $12.58 billion in 2019. A rising cash-adjusted bottom line is great news for those in Broadcom for the dividend. Plus, that adjusted EBITDA represents about a 55% profit margin at the midpoint of next year's revenue guidance. Even in uncertain times, Broadcom is a highly profitable business.  

Image source: Getty Images.

Competition is coming, but Broadcom is unfazed

Of course, dividends are far better when the portions increase over time, and Broadcom is laying the groundwork to continue delivering the goods. The quarterly payout was raised 23% to $3.25 per share thanks to good progress integrating the new software prizes -- making for an annual yield of 4%. Not bad at all for a tech stock.  

But there's more going on here than just current dividend yield. CEO Hock Tan waxed optimistic during the quarterly call, saying that his company's bet on data center and networking hardware and software is a long-term secular growth trend that should deliver positive results for the foreseeable future.

Broadcom thus plans on raising its investment in this area and reducing spending on its wireless and industrial silicon. Some of the early fruits of those efforts? New in-house developed photonics systems for fiber optic connections in cloud computing applications. In the days leading up to the Q4 report, a new AI-based software platform for business decision making and a new 25.6 terabyte per second ethernet switch were also announced.

Cisco (CSCO -0.52%) tried to steal some of Broadcom's thunder, though, making its own grandiose announcement that it would begin selling its first networking chips apart from its proprietary routers and other networking hardware. When asked about the move, Tan said his company "welcomes the competition" as Cisco is simply validating the trend Broadcom sees: that customers want disaggregation of the hardware from the software. They want to pick and choose what they want, not a pre-packaged suite like Cisco has historically sold to data center builders. While Broadcom now plays in hardware and software, it doesn't require any of its customers to bundle its products.  

In summary, Broadcom wrapped up a pretty decent year considering the headwinds it was facing, and the initial view is that business will continue to stabilize in 2020. With a big dividend boost, and profitability still on the rise, this tech giant is an income investor best-buy.