Nomura Upgrades Broadcom, Sees Dividend Hike Ahead

Broadcom Inc AVGO's second-quarter earnings were so good that one Wall Street analyst said they had no choice but to upgrade the semiconductor company. 

The Analyst

Nomura Instinet analyst Romit Shah upgraded Broadcom from Neutral to Buy and raised the price target from $225 to $300.

The Thesis

Broadcom’s controversial acquisition of CA, Inc. CA is actually starting to make sense, Shah said in the Monday upgrade note. (See his track record here.) 

The company's strategy is to combine hardware, silicon and software to create unique intellectual property, the analyst said. CA also provides an opportunity for Broadcom to market its ASIC solutions and various hardware products, he said. 

In addition to a bullish growth outlook, Shah said Broadcom’s $8 billion in 2018 free cash flow will provide an opportunity for the company to boost its dividend payout to $9 per share, which would represent a generous yield of about 3.8 percent.

The analyst expects Broadcom to continue aggressively buying back stock.

Based on Nomura’s 2019 and 2020 EPS estimates of $21.19 and $23.26 and Broadcom’s long-term earnings multiple average of 13x, Shah said there is plenty of upside to the stock at its current price.

“This multiple is based on earnings excluding stock comp. and might be conservative, as CA should boost gross margin above 70 percent while simultaneously lowering wireless revenue to less than 25 percent." 

Broadcom's recent wireless guidance removes much of the potential uncertainty about wireless revenue growth in fiscal 2020, Shah said. 

Price Action

Broadcom shares were trading up 0.17 percent to $236.70 at the time of publication Monday. 

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