We've all witnessed the volatility of the market in recent months and in particular, the wild swings within the technology sector. Broadcom Inc.(AVGO) has not been immune to these swings and despite what many would agree was a fairly good earnings report for Q4 and full fiscal year 2018, the after hours spike was tempered Friday afternoon as the general negative market sentiment as of late weighed heavily on nearly all stocks. AVGO is a new position for the portfolio and while adding this position, I also picked up some additional share of General Mills Inc. (GIS). General Mills, along with what seems all other consumer staple stocks, remains out of favor on wall street despite rapidly approaching a 5.0% dividend yield and 10% FCF yield. Take a look below for details of the purchase and a few of the metrics that are considered prior to purchase.
----- Broadcom Inc (AVGO) -----
Purchased: 5 shares x $225.00 = $1,125 (+$4.95 commission)
Dividend Income: This purchase adds $53 of income annually ($10.60 annual dividend; paid quarterly in Mar, Jun, Sep, and Dec)
Forward P/E ratio: 10.4 vs. S&P Forward P/E @ 16.65
Debt to Capital < 50%: Yes, 39%
Interest Coverage ratio of at least 3:1: Yes, 5.9x
S&P and/or Moody's credit rating of BBB+/Baa1 or better: No, BBB-/Baa3
Current dividend yield > 1.5x S&P yield: Yes. 4.7%
Payout Ratio < 60% (or < 85% for utilities): Yes, 48.2%
Dividend King or CCC classification: Challenger (9 years of dividend increases)
Comments: Of all the metrics listed above, the one concern would be the credit rating. Currently, AVGO is assigned the lowest investment grade rating by each of the major rating agencies. However, the company's cash flow is staggeringly high with revenue and earnings growing double digits YoY per the latest earnings release that can be read here which eases my concerns with regards to the credit ratings and cyclicality of the industry. What is more, is that along with the full year earnings release, the company simultaneously announced a 51% dividend rate increase - incredible! As a shareholder in this company there is much to look forward to with the company being so focused on returning so much cash to shareholders - I'll end my discussion on AVGO with the following quote:
----- General Mills Inc (GIS) -----
Purchased: 26 shares x $38.50 = $1,001 (+$4.95 commission)
Dividend Income: This purchase adds $50.96 of annual income ($1.96/sh annually; paid quarterly in Feb, May, Aug, and Nov)
Forward P/E ratio: 12.4 vs. S&P Forward P/E 16.65
Debt to Capital < 50%: No, currently at 71%
Interest Coverage ratio of at least 3:1: Yes, 6.64x
S&P and/or Moody's credit rating of BBB+/Baa1 or better: No, BBB
Current dividend yield > 1.5x S&P yield: Yes, 5.1%
Payout Ratio < 60% (or < 85% for utilities): No, 64%
Dividend King or CCC classification: GIS is listed as a "Contender" with its 14 years of consecutive annual dividend increases. However, management has made it clear that the dividend has been frozen at $1.96 annually as the company focuses on reducing its debt load and maintaining its investment grade rating.
Comments: It is has been some time since I've added to my position in GIS. I initiated my position in the company back in mid 2017 when the price per share descended into the mid $50s. The company will be reporting its Q2 FY19 results here within a couple of weeks and we'll see where the prices goes from there in the short term. Last quarter, management announced that they expect net revenues for FY19 to be up 9-10% driven by the Blue Buffalo acquisition and an increase in operating profit of 6-9%. Despite the short term headwinds of consumer trends and questionable acquisitions I remain convinced that GIS is trading at a value that is well worth the perceived risks and I believe this to be a fantastic deal.
----- Broadcom Inc (AVGO) -----
Purchased: 5 shares x $225.00 = $1,125 (+$4.95 commission)
Dividend Income: This purchase adds $53 of income annually ($10.60 annual dividend; paid quarterly in Mar, Jun, Sep, and Dec)
Forward P/E ratio: 10.4 vs. S&P Forward P/E @ 16.65
Debt to Capital < 50%: Yes, 39%
Interest Coverage ratio of at least 3:1: Yes, 5.9x
S&P and/or Moody's credit rating of BBB+/Baa1 or better: No, BBB-/Baa3
Current dividend yield > 1.5x S&P yield: Yes. 4.7%
Payout Ratio < 60% (or < 85% for utilities): Yes, 48.2%
Dividend King or CCC classification: Challenger (9 years of dividend increases)
Comments: Of all the metrics listed above, the one concern would be the credit rating. Currently, AVGO is assigned the lowest investment grade rating by each of the major rating agencies. However, the company's cash flow is staggeringly high with revenue and earnings growing double digits YoY per the latest earnings release that can be read here which eases my concerns with regards to the credit ratings and cyclicality of the industry. What is more, is that along with the full year earnings release, the company simultaneously announced a 51% dividend rate increase - incredible! As a shareholder in this company there is much to look forward to with the company being so focused on returning so much cash to shareholders - I'll end my discussion on AVGO with the following quote:
"Free cash flow from operations grew 50% in fiscal year 2018 to$8.2 billion . As a result, we are raising our target dividend by 51 percent to$2.65 per share per quarter for fiscal year 2019," saidTom Krause , CFO ofBroadcom Inc. "Looking ahead for the year, we expect sustained revenue growth and improving operating leverage to accelerate cash generation from operations. Our capital allocation strategy remains unchanged for fiscal year 2019. We plan to return 50% of our prior fiscal year free cash flows to stockholders in the form of dividends and use the balance of our free cash flows to buy back stock and support additional acquisitions, while remaining focused on maintaining our investment grade credit rating."
Company Profile: Broadcom Inc. designs, develops, and supplies a range of semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products worldwide. The company operates through four segments: Wired Infrastructure, Wireless Communications, Enterprise Storage, and Industrial & Other. The Wired Infrastructure segment provides set-top box system-on-chips (SoCs); cable, digital subscriber line, and passive optical networking central office/consumer premise equipment SoCs; Ethernet switching and routing application products; embedded processors and controllers; serializer/deserializer application specific integrated circuits; optical and copper, and physical layers; and fiber optic laser and receiver components. The Wireless Communications segment offers RF front end modules, filters, and power amplifiers; Wi-Fi, Bluetooth, and global positioning system/global navigation satellite system SoCs; and custom touch controllers. The Enterprise Storage segment provides serial attached small computer system interface, and redundant array of independent disks controllers and adapters; peripheral component interconnect express switches; fiber channel host bus adapters; read channel based SoCs; and preamplifiers. The Industrial & Other segment offers optocouplers, industrial fiber optics, motion control encoders and subsystems, and light emitting diodes. Its products are used in various applications, including enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Broadcom Inc. is based in San Jose, California.
----- General Mills Inc (GIS) -----
Purchased: 26 shares x $38.50 = $1,001 (+$4.95 commission)
Dividend Income: This purchase adds $50.96 of annual income ($1.96/sh annually; paid quarterly in Feb, May, Aug, and Nov)
Forward P/E ratio: 12.4 vs. S&P Forward P/E 16.65
Debt to Capital < 50%: No, currently at 71%
Interest Coverage ratio of at least 3:1: Yes, 6.64x
S&P and/or Moody's credit rating of BBB+/Baa1 or better: No, BBB
Current dividend yield > 1.5x S&P yield: Yes, 5.1%
Payout Ratio < 60% (or < 85% for utilities): No, 64%
Dividend King or CCC classification: GIS is listed as a "Contender" with its 14 years of consecutive annual dividend increases. However, management has made it clear that the dividend has been frozen at $1.96 annually as the company focuses on reducing its debt load and maintaining its investment grade rating.
Comments: It is has been some time since I've added to my position in GIS. I initiated my position in the company back in mid 2017 when the price per share descended into the mid $50s. The company will be reporting its Q2 FY19 results here within a couple of weeks and we'll see where the prices goes from there in the short term. Last quarter, management announced that they expect net revenues for FY19 to be up 9-10% driven by the Blue Buffalo acquisition and an increase in operating profit of 6-9%. Despite the short term headwinds of consumer trends and questionable acquisitions I remain convinced that GIS is trading at a value that is well worth the perceived risks and I believe this to be a fantastic deal.
Broadcom might be my Dec purchase — and GIS has been on my radar for months - haven’t pulled the trigger yet — nice pick ups
ReplyDeleteThanks! I built my initial position in GIS back in early to mid 2017 when the stock was trading in the low $50s and then moved on to other stocks. With GIS stock valuation dropping precipitously since then and still being fond of the company as a whole, it hard to pass up. With respect to AVGO, I was hopping to be able to make some additional purchases under $230, but with the recent dividend hike, looks like that opportunity may have passed permanently, we'll see, company still remains attractive in the $250 based on current expectations for the near term.
DeleteGIS with that tempting yield looks interesting. I know many do not like the food staples these days but seeing that high yield may be too much to pass up. Keep the buying going.
ReplyDeleteI love to buy the stocks that are getting much love from Wall St. as is the current situation with GIS and many others, and often shun those getting too much attention (like NVDA earlier this year, but after falling drastically, looks much more appealing now). You've may have noticed that I have been picking up shares of BAYRY as of late and hope to grow the position much larger than it is currently while it is out of favor with the broader community. Interestingly enough, there are a few other German companies that have grabbed my attention as of late, but I likely won't bother with them until my BAYRY position is much larger.
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