Broadcom (AVGO) vs. Texas Instruments (TXN): Which Dividend-Paying Semiconductor Stock Should Investors Own?
According to Fortune Business Insights, the global semiconductor market is expected to reach $803.15 billion by 2028, growing at a CAGR of 8.6%. This growth is projected to be driven by broader usage of chips in Artificial Intelligence (AI), the Internet of Things (IoT), and machine learning technologies.
Despite global semiconductor sales rising 29.7% year-over-year in August, the semiconductor industry experienced a selloff, as evidenced by a 6% loss in the iShares PHLX SOX Semiconductor Sector Index ETF (SOXX) over the past month. However, this dip could be a great entry point for long-term investors, allowing them to buy shares of semiconductor companies at a discount.
Keeping that in mind, I am going to analyze and compare two dividend-paying stocks engaged in semiconductor activities: Broadcom Inc. (AVGO) and Texas Instruments Incorporated (TXN), to see which is currently the better investment.
Based in San Jose, California, Broadcom Inc. is a global technology company that produces and sells a variety of semiconductor and infrastructure software solutions worldwide.
Year-to-Date (YTD), Broadcom shares have increased about 13%, underperforming the broader market’s benchmark and S&P 500, which both have returned about 16%.
On September 30th, Broadcom agreed to sell its SaaS-based testing platform, known as BlazeMeter CT, to Perforce Software. The deal, which did not disclose the value of the transaction, is expected to be closed in October 2021.
Financial Overview & Analysts Estimates
In Q3, Broadcom’s revenue rose around 16.5% on a year-over-year basis to $6.78 billion. This revenue growth was driven mainly by higher demand for its semiconductor products and infrastructure software and assisted the company in beating Wall Street’s revenue estimates by $20 million. The company’s net profit stood at $1.88 billion versus its year-ago value of $688 million. As a result, AVGO reported a Non-GAAP EPS of $6.96, topping Wall Street expectations by $0.05.
The stock’s current annualized dividend rate is $14.40 per share, which translates to a dividend yield of 2.92% as of October 12th. The company’s payout ratio currently comes in at 51.47%, leaving plenty of room for future increases. AVGO’s dividend payouts have increased at a 49.32% CAGR over the past five years. Finally, it is important to highlight the company has a record of 10 consecutive years of dividend growth.
For the fourth quarter, the analysts expect AVGO’s EPS to stand at $7.74
compared to $6.35 in the year-earlier period. The company has beaten Wall Street consensus estimates in the past four consecutive quarters. Additionally, a $7.36 billion average revenue estimate for the next quarter indicates a 13.80% improvement year-over-year.
Texas Instruments Incorporated
Founded in 1930, Texas Instruments Inc. is an American company that designs and manufactures semiconductors and various integrated circuits, which it sells to electronics designers and manufacturers globally.
Year-to-Date, shares of Texas Instruments Inc. are up about 18%, slightly outperforming the broader market.
On September 15th, the company declared a quarterly dividend of $1.15, 12.7% higher than the prior dividend of $1.02. Taking into account the current annualized dividend payout of $4.60, the company’s dividend yield stands at 2.38%. Also, the company has a payout ratio of 57.61%, with a 5-year dividend CAGR of 21.83%. TXN has also been consistently increasing its dividends 15 years in a row.
Financial Overview & Analysts Estimates
On July 21st, Texas Instruments Inc. reported earnings for the second quarter of 2021. In Q2, total revenue has increased 41.4% year-over-year to $4.58 billion. The company also managed to beat analysts’ revenue estimates by $220 million. TXN reported a Non-GAAP EPS of $1.99, surpassing Wall Street expectations by $0.14.
Currently, Wall Street expects TXN’s EPS to rise 41% year-over-year in the third quarter to $2.05 per share. Following the same trend, analysts expect that its third-quarter revenue should increase to $4.66 billion. This estimate suggests a rise of about 35.60% on a year-over-year basis.
In terms of Forward P/E, TXN is currently trading at 24.22x, which is higher than AVGO, whose multiple is currently standing at 17.60x. In addition, Broadcom’s Forward P/E multiple looks undervalued compared to the sector’s median threshold of 24.22x.
When it comes to the Forward EV/EBITDA multiple, TXN’s EV/EBITDA multiple of 18.97x is about 34% higher than AVGO’s 14.12x. Also, Broadcom’s multiple looks discounted compared to the sector median of 15.34x.
Finally, Broadcom has a better margins profile with gross profit and EBITDA margin of 73.61% and 52.53%, respectively. These numbers exceed the TXN figures by 13% and 6%, respectively.
The Bottom Line
I believe that AVGO, at these levels, is a better investment than TXN. The company has a higher dividend yield as well as a higher 5-year dividend growth rate. In addition, AVGO looks cheaper from the valuation standpoint, trading with a discount compared to the sector’s median levels.
Wall Street also rates AVGO as a “Strong Buy,” with an average price target of $570.94, which represents over 15% upside.