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these semiconductor industry has been flying lately we've seen Nvidia fly we've seen broadcom currently fly and we're going to take a look now specifically at avco currently trading at 803 dollars to determine if you're a shareholder is it a good time now to sell let it cool off as it's had a great run or even as a potential investor what price should we be looking to enter this company and is it a great company or not what we're going to do is take a look at the dividend safety we're going to run through some really important Financial metrics and we're going to end the episode looking at the stock valuation model looking out for valuation models getting to our intrinsic value and looking at with our margin of safety what would be our acceptable Buy price now as you know currently broadcom has been flying if we look at the last 30 days it is up 27 now a lot of money has been going into these stocks like avco like Nvidia and all these semiconductors and these chips now what that means is the broader Market has been pulling back slightly so what we want to understand is is there a reason for this or should we be looking to either sell this stock or as a potential investor wait before we buy now currently the yield is at 2.26 percent and it's trading nearly towards that 52-week high of 921 dollars over the last six months this stock is also up 46 and if you've been a shareholder for around 10 years purely on share price appreciation you're up over 2 000 which is incredible and that doesn't take into account the dividends which are quite decent if you ask me now let's jump into the dividend safety and some important metrics so we can see here a dividend safety score of 67 which isn't as high as we've seen in our latest videos but let's delve into why we think this is market cap currently at 335 billion I believe nvidia's is currently around 1 trillion so is there room for this company to grow is this company overvalued let's find out some key metrics again we're going to run through these shortly but just to point out the recession sales were negative 12.7 during the last recession and if there is a recession going to happen we want to find out what effect this will have on this company the rest we're going to take a look at now and just to note in the last recession avco we're not paying dividends so we are unable to see whether they maintained this or not now dividend growth one of the beautiful things about this company is over the last 10 years their dividend cake has been 39 which means if you have held this stock for over the last 10 years your dividend on average has been increasing 39 in my videos I typically say you want to be hitting that sweet spot of at least four percent due to that being the inflation rate in the US over the last 30 40 years and you don't want your purchasing power to decrease but 39 over the last 10 years 29 over the last five years and 12 in their latest increase in December is absolutely incredible now they have been having this dividend for 12 years so long may that continue and they will be on their way to Dividend Aristocrat status if they reach 25 years so very positive at the moment now again we never look at any theory in isolation but looking at dividend yield Theory it states that if the current yield is sitting above the five-year average it is undervalued and if it's sitting below like it currently is it is overvalued so potentially this is a first sign of overvaluation with the yield at 2.29 and the five-year average at 3.26 again likewise The Five-Year forward P has been sitting at 14.
currently it's at 19.2 and just one thing to note as we can see here as it does seem to top it does come down drastically so in my opinion so far based on these two it could potentially be overvalued currently however when we look at comparing broadcom to the information technology sector it is below 21.4 however we don't know what bucket this is in and we can take a look at this when we look at our valuations again as mentioned it is going towards that 52-week high so lots of different positive signs and things to be aware of earnings power ratio free cash flow power ratio I love looking at the free cash flow payout ratio with the earnings it's more susceptible to manipulation through earnings so for me I tend to disregard this for the majority of companies but for potential investors let's take a look so for me my golden dividend metric is that it is below 60 so it can continue to grow at that dividend streak and as we can see here for the large part is below 60 excluding 2020 so for me that's a positive likewise with the free cash flow power ratio below 60 43 in 2022 in their latest report so for me a very positive lots of room to grow that dividend now this for me is probably one of the most phenomenal things that I have seen when covering stocks from different companies the earnings per share again I prefer to look at that free cash repair issue but they're earnings per share from 2013 to 2020 has increased astronomically and I think the same we can say for free cash flow per share if the company continued to increase in this rate again we we don't know what's going to happen this could be a very very good long-term stock again just because I say that it doesn't mean we should be buying the stock straight away we need to fully understand the valuation in other metrics now sales growth I put I mean I personally prefer to look at three to seven percent but again this is phenomenal in the earlier years 69 60 94 it has slowed down and the latest was 21 when we look at it in terms of total sales that is a lot to like 2.52 billion worth of sales in 2013 2022 more than 10 times 33.2 billion so incredible growth now positive so far now one thing where for me is a slight Red Flag Company like avco I would expect them to either have a flat share outstanding or for it to be declining as a declining graph is essentially when we the company is returning excess cash to shareholders but what this is effectively doing is diluting your ownership of the company if you had held so for me this is a slight red flag however again we don't look at things in isolation so this coupled with the other metrics for me is positive but ideally I would like to see this come down or at least remain flat return on invested Capital 10 and above for me is the is The Sweet Spot and as we can see here I would say on average it has been around 10 plus there have been a few years where it's been below that but overall on the balance of things I think that's very positive now operating margin free cash flow margin won't spend too much time but above 16 for semiconductors which avco have done and above five percent for the free cash flow margin again incredible as we can see over the last 10 years I'd say well the last eight years from around 27 low to 55 is very very positive last thing I'm going to mention is around their debt in these metrics net debt earnings before interest tax depreciation amortization so essentially we're saying in 2022 it would take advgo 1.3 years to pay off its debt net of cash on hand personally prefer 1.5 on the main well on the grand scheme of things I wouldn't say anything to worry about but if we continue to see it go over this line over the next four or five years could be something to take a look into but nothing to worry me again same here below 0.4 which means in 2022 55 of the company's financing was from debt rather than Equity but like I said nothing really that worries me so far now we move on to the valuation System model in my personal opinion avgos so far is a great company that I would be wanting to invest in again not Financial advice but the most important thing is to ensure we get it at the right price we want to buy undervalued dividend growth stocks now we're going to start off with Graham's valuation Graham's valuation formula smash the like button if you're enjoying the content smash the Subscribe Button as it really does help me and the channel to progress and I'll keep pumping these videos out day by day so we input I've got we input the earnings per share 29.66 now the growth rate based on analyst estimates of around 10 and we input again the current yield on AAA corporate bonds which seems to get higher and higher every day intrinsic value surprisingly 475 dollars which is significantly lower than the current trading price and actually funnily enough right at that 52-week low so again we don't look at anything in isolation and we move on and we'll consider that at the end multiples valuation so what we're doing here is looking at companies similar to avgos similar sector similar business and size we have Texas Instruments Qualcomm nxp semiconductors we input the stock price input the earnings per share and it gives us the P multiples we then get the average and multiply it by the earnings per share to give a stock price of 487 dollars very similar to Graham's valuation model and towards the 52-week low of avco now probably the most strongest point in terms of avco in my opinion in terms of their metrics is how rapid they increase that dividend now as we can see over the last five years they've increased around 50 one year twenty two percent 10 13 12 so quite High double digit numbers average growth of 22 and in terms of the formula we're getting the next year dividend over the cost of equity less the growth rate now you're probably looking why have I gone for a lower growth rate I'm not convinced that they're going to be able to keep up these extremely high dividend growth rates over the next well forward looking so I've gone for something around seven percent I think it's a bit more conservative but I do not think it's unreasonable this gives a DDM price of a 984 dollars now again it's right up there at the 52-week high and this is why I say we never look at any model in isolation we want to look at a few different models understand them and then use them as well use them effectively to get the average intrinsic value we then look at the discounted cash flow model and we get the free cash flows over the last 10 years and look at this you know we're looking at lots of high growth over the period average 53 so this is a company that is continually growing and fast now I've gone with 10 again even lower than analyst estimates because for me I want to be on the more conservative side when I'm looking at this and I'm not too convinced they're going to be able to keep this up for the next 10 years I could be wrong but again this is the assumptions I'm making and I'm letting you know in the model future free cash flows is then derived from our growth rate and the terminal value we then use our discount rate to get to our present value of future free cash flows and we add these together with the terminal value add the cash subtract the debt and get to our Equity value if we then divide by the shares outstanding to get a DCF price of 970 dollars which is in line with the dividend discount now smash the like button smash the Subscribe button so I can keep pulling out this content and put your thoughts in the comments so I know what you are thinking great so now we have our full valuation models and now our intrinsic value is essentially the average of these four so essentially we're saying the intrinsic value based on what we've just discussed is just around 730 dollars now the current share price is 803 dollars now typically I'd be looking personally for a margin of safety on a company like broadcom around 10 if I really like it and you know there's something where I think this is a great company which in my opinion it is I would be happy with a five percent margin but typically I like to see a 10 margin so this would mean an acceptable Buy price of 656 dollars just to show you they were at that I believe if we just look at the last six months if we look around here they were around that not too far ago over the last month in fact so for me it's not something that it's impossible they have increased rapidly so there is a strong chance of a pullback now for those that want a 20 margin of safety and I think there's nothing wrong with that 583 dollars and that is well within that 52-week range and again was probably around that not too long ago I think I believe early March so Wall Street Price Forecast over the next 12 months they believe the price to come to down in fact to 736 dollars and the current price is 803 dollars so in conclusion my thoughts are that if I was a current shareholder I would either if I was a long-term investor I would probably hold on to the stock if I was looking to make a profit I would probably sell given that not only we've just run through the intrinsic value is lower than the current price but also analyst and the evidence we have to back that up are suggesting the price will come down now again we'd have a crystal ball so we don't know when this will be but as always if you've liked the show smash the like button smash the Subscribe button and let me know your thoughts in the comments as shareholders are you looking to buy more are you looking to sell and as potential investors what price are you looking to get in at if at all thank you and have a lovely day
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