The S&P 500 is inching its way back toward its previous highs, but there are still quality companies trading at cheap valuations and some pay dividends with yields that far exceed the index’s current average of 1.26%.
Broadcom (AVGO) and Intel (INTC) are riding strong demand trends in the semiconductor industry. Both trade at a discount to the average valuation of other blue chips and, at current share prices, both sport yields of more than 2.4%. Here’s why it’s the right time to open positions in these two tech component suppliers.
Broadcom is a key supplier of networking components, such as fiber optic transmitters, ethernet switches, and embedded processors that are used in data centers. Given the long-term tailwinds favoring higher enterprise spending on data center capacity, Broadcom is a solid growth stock to consider. Its share price has tripled over the last five years, but its dividend still yields an above-average 2.4%.
It’s uncommon to find a growth stock with such a high yield. For example, high-flying graphics chip maker Nvidia’s dividend yields just 0.06% at its current share price. Growing companies usually have plenty of ways to reinvest more of their profits into new product lines, delivering returns to investors by growing the business. But Broadcom has benefited from rising demand for its products while also returning nearly half of its free cash flow to shareholders in dividends. This reflects a strong and very profitable business.
Broadcom reported solid revenue growth of 16% year over year in the first quarter of its fiscal 2022, which ended Jan. 30. Management credited accelerating demand from enterprise IT spending, upgrades in data centers and cloud service providers, and telecommunication companies that are deploying next-generation fiber-to-the-home service.
While the company continues to experience long lead times in the supply chain, the best news was the outlook. Management expects revenue growth to accelerate in its fiscal second quarter compared to the prior-year quarter’s 15% growth rate.
The outlook for double-digit growth is compelling for a stock that trades at a modest valuation of 17.5 times fiscal 2022 earnings estimates. The dividend has increased from $1.94 per share in fiscal 2016 to an expected full-year payment of $16.40 in fiscal 2022. The steady rise in the dividend is supported by free cash flow that more than doubled to $13.3 billion over that period.
With the company experiencing robust demand for its products, this is a solid investment that could beat the average return of the market.
Intel has lost some market share to rival Advanced Micro Devices over the last few years, which has contributed to its stock price underperforming the broader market. But Intel has started to fight back. Since the third quarter of 2021, its share of central processing units (CPUs) sold improved from 60% to 66%, according to data from Passmark Software. This improvement came after Intel started shipping its new Alder Lake (Intel 7) 10-nanometer processors last year. In July, Intel unveiled a detailed roadmap for its plan to regain market leadership through 2025 and beyond, and it seems to already be showing progress.
Intel’s weak performance over the last few years, during which it suffered from manufacturing delays that postponed the release of its 7-nanometer chips (Intel 4), doesn’t mean it can’t catch up. This is a company that generates $79 billion in revenue and spends $15 billion on research and development every year. There’s plenty of free cash flow to fund a growing dividend.
Intel recently raised its quarterly payout by 5% to $0.365 per share. That brings the dividend yield to an attractive 2.7% at recent share prices. Even as free cash flow fell last year to $11.3 billion, the company paid out 50% of that free cash in dividends. That combination of a relatively modest payout ratio and a high yield makes Intel a great income stock since it can sustain dividend increases even as it invests to speed up innovation in advanced process technologies.
The stock trades at 15 times 2022 earnings estimates, which is below the market average earnings multiple of 18. It’s also well below AMD’s forward P/E of 30.
With Intel starting to reassert its enormous financial advantages over its smaller rival, this would be a good time to place a bet on a comeback by Chipzilla, especially while it trades at a discounted valuation and pays a dividend with an above-average yield.
Originally published on Fool.com
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
John Ballard owns Intel. The Motley Fool owns and recommends Advanced Micro Devices, Intel, and Nvidia. The Motley Fool recommends Broadcom Ltd and recommends the following options: long January 2023 $57.50 calls on Intel and short January 2023 $57.50 puts on Intel. The Motley Fool has a disclosure policy.