Inflation, rising interest rates, and other macroeconomic headwinds crushed many high-growth tech stocks this year. However, slower-growth blue-chip tech stocks -- especially those that traded at lower valuations, generated stable profits, and paid high dividends -- generally fared better.
Broadcom (AVGO 2.57%) and Cisco Systems (CSCO 0.55%) are two of those stalwarts. Over the past six months, Broadcom's stock is up about 14%, Cisco's stock dipped about 7%, while the Nasdaq Composite declined about 15%. But will Broadcom remain a stronger tech dividend stock than Cisco for the foreseeable future?
Image source: Getty Images.
How fast is Broadcom growing?
In 2021, Broadcom generated 74% of its revenue from its semiconductors solutions business, which sells a broad range of chips for the data center, networking, software, storage, and industrial end markets. The remaining 26% came from its infrastructure software business, which was mainly built from its acquisitions of CA Technologies in 2018 and Symantec's enterprise security business in 2019.
Broadcom's revenue rose 15% to $27.45 billion in fiscal 2021, which ended last October. Its semiconductor revenue grew 18%, driven by robust sales of its chips across the cloud, data center, and wireless markets. It also benefited from Apple's strong hardware sales, since the iPhone maker accounted for about a fifth of its full-year revenue. Its infrastructure software revenue increased 7% to $7.07 billion.
Its adjusted gross margin expanded 100 basis points year over year to 74.5% in fiscal 2021, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 21% to $16.6 billion. Its adjusted earnings per share (EPS) increased 26%.
Braodcom's free cash flow (FCF) improved 15% to $13.3 billion for the full year, and it spent $6.2 billion of that total on dividends and another $1.3 billion on share buybacks. It has raised its dividend annually for more than a decade, and it currently pays a forward yield of about 2.8%.
Like many other chipmakers, Broadcom faces concerns about a cyclical slowdown in chip sales. Even so, analysts still expect its revenue and adjusted EPS to rise 16% and 27%, respectively, in fiscal 2022. Those are solid growth rates for a stock that trades at 17 times forward earnings.
How fast is Cisco growing?
Cisco generates most of its revenue from networking switches and routers. It's the top producer of both types of devices, but it's gradually ceded both markets to formidable challengers like Huawei, Arista Networks, and Hewlett-Packard Enterprise over the past few years.
To diversify its business away from those saturated legacy markets, Cisco expanded its cybersecurity software and applications businesses with a long line of acquisitions. It then bundled a lot of its software products with its networking hardware to lock in more customers and widen its moat.
In fiscal 2021, which ended last July, Cisco's revenue rose just 1% to $49.8 billion. Its adjusted gross margin declined 10 basis points to 66.1%, but its operating margin still expanded as its adjusted EPS stayed flat.
Those growth rates were anemic, and Cisco's hardware business faced additional supply chain challenges throughout the first half of fiscal 2022. But it still expects to overcome these near-term challenges and grow both its revenue and adjusted EPS at a compound annual rate of 5% to 7% between fiscal 2021 and fiscal 2025. Analysts expect its revenue and adjusted EPS to grow 6% and 7%, respectively, this year. Based on those estimates, Cisco trades at just 14 times forward earnings.
Management believes its growth will accelerate again as it expands its subscription-based software businesses, diversifies its hardware portfolio beyond routers and switches, and makes more acquisitions.
Cisco paid out 61% of its FCF via $6.2 billion in dividends and $2.9 billion in buybacks in fiscal 2021, and it plans to return more than half of its FCF to investors for the foreseeable future. It's also raised its dividend annually for over a decade, and it currently pays a forward yield of nearly 3%.
The better buy: Broadcom
Broadcom and Cisco should both be fairly safe plays during a market downturn. Both companies are firmly profitable, generate plenty of cash, pay stable dividends, and trade at low valuations.
But if I had to pick one over the other, I'd stick with Broadcom because it's growing faster and it's better diversified. Cisco's plans for the future are reassuring, but it still faces a lot of near- to mid-term challenges.
