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Broadcom: A Successful Serial Acquirer

Jun. 12, 2020 3:31 AM ETBroadcom Inc. (AVGO)AVGOP14 Comments
Enterprising Investors profile picture
Enterprising Investors


  • Broadcom is a diversified semiconductor and software infrastructure company.
  • It has a high free cash flow conversion and uses that to pay a high dividend. The current forward dividend yield is about 4%.
  • The company was built with acquisitions which also significantly increased debt over the past few years.


Broadcom (NASDAQ:AVGO) is one of the largest semiconductor companies in the world. Over the past few years, it has built the company through acquisitions. This has caused revenue to soar. Revenue more than tripled from 2015 until 2019. Broadcom funded these acquisitions with a lot of new debt on its balance sheet. It also differentiated its business through these acquisitions. It became a combination of semiconductors and infrastructure software.


This worked out very well over the past few years. Revenue accelerated impressively and they've been able to increase dividends as well. This all came at the expense of a large pile of debt. The share price has gained impressively as well:

Impressive Cash Flow

According to the second-quarter results, Broadcom reported a free cash flow of $3,065 million. Broadcom mastered the art of turning acquisitions in more free cash flow. The free cash flow from operations jumped $523 million since the second quarter of 2019. It's not clear how much came from the Symantec acquisition. It should be substantial as semiconductor revenue is stable and infrastructure software revenue rose by 19%.

There are some remarks about this free cash flow. They've had costs related to acquisitions which they exclude from this free cash flow. This is correct as these costs shouldn't be structural. However, since they've done so many acquisitions, this seems to have become a continuing cost. The company explicitly states that acquisitions are a part of the business strategy:

Our strategy is to combine best-of-breed technology leadership in semiconductor and infrastructure software solutions, with unmatched scale, on a common sales and administrative platform to deliver a comprehensive suite of infrastructure technology products to the world’s leading business and government customers. We seek to achieve this through responsibly financed acquisitions of category-leading businesses and technologies, as well as

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Enterprising Investors profile picture
In short: focus on free cash flow growth, GARP, value, thorough analysis, and a lot of common sense. I follow value investing principles and do my research through publicly accessible knowledge. I look for stocks trading below their actual value. Buying at the right time and holding shares for a long time leads to attractive profits. All expressions are my own. I do not represent a company. I cover stocks worldwide, mainly in North America and Europe. All my experience in stock picking comes from reading books and articles. Any investments you would take after a piece or discussions with me are your own responsibility. You should do your own due diligence before an investment.

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Comments (14)

yardbird99 profile picture
This company is the brainchild of Hock Tan, and he has a very creative strategy. His acquisitions are sometimes denigrated, but they have proven profitable. There is some talk about AVGO spinning off its chip business and going in another direction, perhaps focusing on software. It's a long time hold for me. There's some risk here, but great reward potential.
Dividend Latitude profile picture
Yes, the debt is a concern.
Enterprising Investors profile picture
As long as the EBITDA keeps growing at the same they'll be fine. A fallback in EBITDA could be punished quickly with this amount of debt.
Dividend Latitude profile picture
@Enterprising Investors

Looking forward to your next article, "General Mills: A Successful Cereal Acquirer"
zito profile picture
The current economic environment should help slow acquisitions for a year or two which should be very positive. Flat earnings forecast for 2020 then up 15% in 2021 for a forward PE of 12.5.
whiplash542 profile picture
If you do like AVGO, you might consider AVGOP. It yields 7.56%, and has mandatory conversion to 3.03 shares of AVGO on 9/30/22. Price always parallels AVGO’s but you get the higher yield. Only problem is, it’s very thinly traded.
Neurology profile picture
Are there any other downsides to avgop? It has double the yield. How does that exist in a rational market?
@Neurology it's a preferred share.
Not for the faint at heart but love the divy and the increases, look at the 10 year increases, .07 to $3.25 a quarter, nobody beats this!!
papita profile picture
AVGO is a mystery stock. I think the amount of debt it carries hampers the stock performance. they had a nice report recently, the stock rallied to 328 and fell all the way back. not the best performer and be prepared to hold for a while as this stock has periods of long underperformance. shareholders are usually rewarded if they hold long enough.
Enterprising Investors profile picture
The amount of debt makes the stock more volatile than others. Its performance has been impressive so far.
Interesting, I will have to look up what products they are in before jumping in.
Enterprising Investors profile picture
It's a long list of products. In their annual report (10-K) they explain what products they are in and what's their use.
zito profile picture
They are in very strong markets with good products. The key strength is cutting expenses in fat tech firms.
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