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It looks like Broadcom Inc. ( NASDAQ:AVGO ) is about to go ex-dividend in the next three days. Ex-dividend means that investors that purchase the stock on or after the 18th of December will not receive this dividend, which will be paid on the 31st of December.
Broadcom's next dividend payment will be US$3.60 per share. Last year, in total, the company distributed US$13 to shareholders. Last year's total dividend payments show that Broadcom has a trailing yield of 3.2% on the current share price of $405.82. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.
View our latest analysis for Broadcom
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. An unusually high payout ratio of 201% of its profit suggests something is happening other than the usual distribution of profits to shareholders. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 48% of the free cash flow it generated, which is a comfortable payout ratio.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Broadcom fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Broadcom earnings per share are up 4.7% per annum over the last five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, Broadcom has lifted its dividend by approximately 48% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.