Broadcom Stock Is Cheap, Selling Below Its Historical Averages

Broadcom Ltd (AVGO) stock trades well below its historical averages in terms of its historical dividend yield and price-to-earnings (P/E) ratios. Moreover, the semiconductor company is using its huge cash flow to do large buybacks. These factors make it attractive to value buyers.

Bargain hunters are happy to pick up the stock here as it is now down almost 23% in the past six months. In addition, it has a decent dividend yield and a low forward P/E multiple. 

Cheap by Historical Metrics

For example, at $473.58 on Wednesday, Oct. 5, AVGO stock has a 3.46% dividend yield with its $16.40 per share annual dividend. Broadcom has now announced its final dividend for 2022 and is likely to raise it again next quarter. 

Moreover, in the last 4 years, its dividend yield has averaged 3.22%, which is lower than its present 3.46% yield, which could go higher with a dividend hike. This implies that the stock could rise by 18% to $560.25 per share if the dividend rises 10% next year. This can be seen by dividing a 10% higher dividend of $18.04 by 3.22% (i.e., $18.04/.0322 = $560.25).

In addition, analysts project that earnings for the year ending Oct. 2023 will reach $40.86 per share, up 9.25% from the $37.40 forecast for this year ending Oct. 31, 2022. That puts the stock on a forward P/E multiple of just 11.6x. 

But, according to Morningstar, AVGO stock has averaged 13.99x over the past 5 years. This implies that the stock could rise to $571.63, just based on it average metric (i.e., $40.86 x 13.99x). That represents a potential upside of 20.7% for AVGO stock.

Where This Leaves Investors in AVGO Stock

Based on these two target prices, $560.25 using historical dividend yield, and $571.63 using historical P/E metrics. The average is $565.94, or 19.4% upside from today's price. 

And that is just if the stock rises to its historical averages. There is no guarantee this will happen in the short run. However, value buyers know that over time stocks tend to revert to their mean valuation metrics.

Keep in mind that one potential catalyst helping this happen is the company's large share buybacks. Last quarter Broadcom spent $1.736 billion on share repurchases. Annualized that works out to almost $7 billion, or 3.75% of its total $185 billion market capitalization. This is an extra buyback yield for shareholders.

Once the market's fears about a deep recession begin to abate, expect to see AVGO stock make a good rebound. In the meantime, investors are getting paid to wait with the ample dividend.

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