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2024.07.10 08:09
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Should You Buy Broadcom Stock Ahead of Its 10-for-1 Stock Split? Here's What History Shows.

Broadcom announced plans for a 10-for-1 stock split, leading to a 17% increase in its stock price. Past data suggests that companies initiating stock splits have generated total returns of 25% in the following year. Broadcom reported strong financial results, with a 43% increase in revenue and a 6% increase in adjusted earnings per share. The company also has a track record of increasing dividends and is well-positioned in the growing AI market. Given its consistent growth and potential for future increases, Broadcom stock is considered a buy.

On June 12, in conjunction with the results of its fiscal 2024 second quarter (ended May 5), Broadcom (AVGO -0.72%) announced plans to initiate a 10-for-1 stock split. Shareholders of record as of Thursday, July 11, will receive nine additional shares for each share of common stock they own. The split will be conducted after the market close on Friday, July 12, and the stock will begin trading on a split-adjusted basis when the market opens on Monday, July 15.

Shareholders were clearly excited about the upcoming stock split. Broadcom stock has gained 17% in the roughly four weeks since the announcement, bringing its total ascent to 102% over the past year.

After gains of that magnitude, investors are left pondering the quintessential investing question: Is Broadcom a buy ahead of its highly anticipated stock split? Let's see what lessons we can glean from history.

Image source: Getty Images.

An object in motion...

Students of history will note that Broadcom, at least in its present form, hasn't had a stock split since it merged with Avago Technologies in 2015. Fortunately for investors, there are other resources that offer insight into how Broadcom stock will perform going forward.

A study conducted by analysts from Bank of America found that companies that initiated stock splits generated total returns of 25% in the 12 months following the completion of the split, compared to returns of just 12% for the S&P 500.

To be clear, it likely wasn't the stock split itself that was the catalyst for the additional gains, but rather the strong operating and financial results that led to the split in the first place.

Sir Isaac Newton's first law of motion reveals that an object in motion tends to stay in motion unless acted upon by an outside force. Put another way -- and in the context of investing and stock splits -- this can be distilled down to the simple concept that winners tend to keep winning.

Is Broadcom stock a buy?

While the potential for short-term gains may be intriguing, investors with a longer time horizon are still left wondering whether Broadcom stock is a buy before its highly publicized stock split. A look at the company's recent results can help provide context.

In the second quarter, Broadcom reported revenue that jumped 43% year over year to $12.5 billion. This drove adjusted earnings per share (EPS) up 6% to $10.96. Management was clear that the results were fueled by robust demand for generative AI. The company revealed that AI-related sales soared to a record $3.1 billion and now represented 25% of its total revenue.

Management also raised Broadcom's full-year revenue guidance to $51 billion, which would represent growth of 42%. This suggests that the current growth trend is poised to continue.

There's also the company's track record of increasing dividends, which is now in its 14th consecutive year. The streak began in mid-2013 with a payout of $0.21 and has now grown to $5.25 per quarter, an increase of 2,400%.

Wall Street expects Broadcom to earn $43.95 per share in 2024. That works out to a payout ratio of 48% of its current-year profits, so there's plenty of potential for future increases.

The AI opportunity

While AI has been all the rage since early last year, most experts believe that the adoption of this groundbreaking technology has just begun. These systems can automate routine and time-consuming tasks, increasing productivity and boosting profitability.

Estimates vary wildly, but the market for generative AI is expected to be between $2.6 trillion to $4.4 trillion over the next 10 years, according to research compiled by McKinsey & Company. Furthermore, estimates have been increasing as time goes by, suggesting that current expectations may be conservative. Broadcom is in the enviable position of having extensive reach in technology systems, which represents an intriguing opportunity as adoption of AI accelerates.

Over the past five years, Broadcom has been on fire, as revenue increased 126%, driving net income up 197%. This has fueled a stock price increase of 521% during the same period (as of this writing), nearly six times the returns of the S&P 500.

Broadcom currently trades for 35 times forward earnings, which is a premium compared to a multiple of 29 for the S&P 500. However, given these returns, Broadcom has earned this healthy premium.

Given the company's consistent track record of growth, extensive reach, and accelerating adoption of AI, it seems abundantly clear that Broadcom stock is a buy.