Broadcom Inc. (AVGO) designs, develops, and supplies various semiconductor devices focusing on complex digital and mixed-signal complementary metal oxide semiconductor-based devices and analog III-V-based products worldwide. The company operates in two segments, Semiconductor Solutions, and Infrastructure Software.
On the other hand, UK-based Shell plc (SHEL) operates as an energy and petrochemical company in Europe, Asia, Oceania, Africa, the United States, and the Rest of the Americas. The company operates through Integrated Gas; Upstream; Marketing; Chemicals and Products; and Renewables and Energy Solutions segments.
Stocks rose in the last trading session to end the first day of the second half in the green. The Dow Jones Industrial Average rose 1.1%, while the S&P 500 rose 1.1%. The Nasdaq Composite was also up by 0.9% to 11,127.85.
However, lingering inflation and even more monetary tightening by the Federal Reserve are on the horizon, raising concerns that the economy might slide into a recession. The S&P 500 closed its worst first-half performance in decades.
And the volatility is expected to persist in the market as economists expect to see a slowing in employment data and declining consumer spending amid the recessionary concerns. Amid such heightened volatility, investors often seek hedge in dividend-paying stocks to ensure a stable income stream. Thus, dividend-paying stocks AVGO and SHEL, which are Buy-rated in our proprietary system, are expected to benefit.
AVGO has gained marginally over the past year, while SHEL has gained 25.2%. Moreover, AVGO has lost 16.7% over the past month and 28.2% year-to-date, while SHEL has lost 11.9% over the past month and gained 19.6% year-to-date.
But which stock has the most upside? Let’s find out.
Latest Developments
On May 26, 2022, AVGO declared that it would acquire all of the outstanding shares of a software company, VMware, Inc. (VMW), in a cash and stock transaction, which should boost its operating capabilities.
On the other hand, on June 1, 2022, SHEL completed the acquisition of company-owned fuel and convenience retail sites from the Landmark Group of companies. This acquisition should foster long-term growth.
Recent Financial Results
AVGO’s non-GAAP net revenue increased 22.6% year-over-year to $8.10 billion for the second quarter ended May 1, 2022. Its non-GAAP net income came in at $4 billion, up 34.2% year-over-year, while its non-GAAP EPS came in at $9.07, up 37% year-over-year. Also, its adjusted EBITDA came in at $5.11 billion, up 29.1% year-over-year.
SHEL’s adjusted earnings increased 182.3% year-over-year to $9.13 billion for the first quarter ended March 31, 2022. Its adjusted EBITDA came in at $19.03 billion, up 64.4% year-over-year. The company’s free cash flow surged 36.8% year-over-year to $10.54 billion. Moreover, its adjusted EPS came in at $1.20, up 185.7% year-over-year.
Dividend Payouts
AVGO has increased its dividend payouts for 11 straight years. Over the last three years, AVGO’s dividend payouts have grown at a 17.9% CAGR and 34.8% CAGR over the past five years. While AVGO’s four-year average dividend yield is 3.20%, its current dividend translates to a 3.43% yield.
On the other hand, SHEL’s four-year average dividend yield is 0.11%, and its current dividend translates to a 3.85% yield.
Past and Expected Financial Performance
AVGO’s revenue grew at a CAGR of 11.2% over the past three years. Analysts expect AVGO’s revenue to increase 19.9% in the current year and 5.9% in the next year. The company’s EPS is expected to grow 31.9% in the current year and 8.6% next year. Moreover, its EPS is expected to grow 14.7% per annum over the next five years.
On the other hand, SHEL’s revenue declined at a CAGR of 8.8% over the past three years. Analysts expect the company’s revenue to increase 32.8% in the current year and decline marginally in the next year. The company’s EPS is expected to grow 87.1% in the current year and marginally next year.
Profitability
AVGO’s 74.89% gross profit margin is higher than SHEL’s 24.41%. Also, AVGO’s EBIT margin and EBITDA margin of 37.67% and 56.20% are significantly higher than SHEL’s 11.07% and 18.08%, respectively. Furthermore, AVGO’s net income margin of 29.76% is also higher than SHEL’s 7.43%.
AVGO’s ROE, ROA, and ROTC of 39.71%, 9.59%, and 11.31% compare with SHEL’s 12.79%, 4.95%, and 7.50%, respectively.
Thus, AVGO is more profitable here.
Valuation
In terms of forward EV/Sales, AVGO is currently trading at 6.78x, higher than SHEL’s 0.64x. In addition, AVGO’s forward EV/EBITDA of 10.79x is 272.1% higher than SHEL’s 2.90x.
Thus, SHEL is a relatively affordable stock here.
POWR Ratings
AVGO has an overall rating of A, equating to Strong Buy in our proprietary POWR Ratings system. On the other hand, SHEL has an overall rating of B, which translates to Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
AVGO has an A grade for Quality, consistent with its higher-than-industry profit margins. AVGO’s trailing-12-month net income margin of 29.76% is 475.5% higher than the industry average of 5.17%. On the other hand, SHEL has a B grade for Quality. Its 7.43% trailing-12-month net income margin is 52.9% higher than the industry average of 4.86%.
Both have a C grade for Stability. AVGO’s 24-month beta is 1.08, while SHEL’s 24-month beta is 0.78.
Of the 96 stocks in the Semiconductor & Wireless Chip industry, AVGO is ranked #7. On the other hand, SHEL is ranked #8 out of 99 stocks in the Energy - Oil & Gas industry.
Beyond what we’ve stated above, we have also rated the stocks for Growth, Value, Momentum, and Sentiment. Click here to view AVGO ratings. Get all SHEL ratings here.
The Winner
Both AVGO and SHEL are expected to benefit from renewed investors’ attention toward dividend stocks amid the market turbulence. However, given AVGO’s higher profitability and solid growth estimates, Wall Street analysts expect AVGO to hit $700.58 in the near term, indicating a potential upside of 46.6%, while SHEL is expected to hit $68.43, indicating a potential upside of 31.9%. Thus, AVGO has the most upside.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Semiconductor & Wireless Chip industry here and the Energy – Oil & Gas here.
AVGO shares were trading at $477.84 per share on Monday morning, down $7.97 (-1.64%). Year-to-date, AVGO has declined -27.10%, versus a -19.14% rise in the benchmark S&P 500 index during the same period.
About the Author: Riddhima Chakraborty
Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.
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