3 Things Every Investor Should Know About This Giant Apple Supplier

With a market capitalization in the neighborhood of $100 billion today, Broadcom (NASDAQ: AVGO) is one of the most valuable publicly-traded chip companies in the world. It raked in about $17.64 billion in net revenue and $2.38 billion in operating income during its 2017 fiscal year.

If you're a Broadcom shareholder or are thinking of investing in the company, here are three things that you should know about it.

Capital allocation strategy

It's important for investors to understand Broadcom's capital allocation strategy, which CFO Tom Krause outlined on the company's Sept. 6 earnings conference call.

He began by explaining that Broadcom has "a set of complementary, highly profitable technology franchises that require limited capital expenditures and sit on top of an efficient corporate platform."

Over the last 12 months, Broadcom laid out $762 million in capital expenditures and generated $20.25 billion in revenue, meaning that capital expenditures totaled just under 3.8% of revenue.

Krause also said that Broadcom generates "a substantial and sustainable base of cash flows that we expect will grow over time." (You can see what he's talking about in the chart below.)

What does Broadcom plan to do with all that incoming cash? Well, per Krause, the company is "committed to our policy of distributing 50% of our prior fiscal year free cash flow to shareholders in the form of cash dividends."

"Given our fourth quarter outlook and expected full fiscal year '18 results, we anticipate another substantial increase in the quarterly dividend for calendar 2019," he said.

The other half of the company's free cash flow will largely be channeled into continued share buybacks, Krause said, observing that Broadcom has $6.3 billion remaining under a $12 billion stock repurchase authorization that extends through fiscal 2019.

Further, he said, "with a focus on maintaining our investment-grade credit rating, we believe we also have the cash flow and the borrowing capacity to continue to expand our earnings base through strategic and accretive acquisitions."

You can read more about Broadcom's latest $18.9 billion buy -- CA Technologies -- here.

Broadcom's business units

Broadcom is a diversified company with four main operating segments: wired infrastructure, wireless communications, enterprise storage, and industrial and other.

Last year, the wired infrastructure business was the largest, raking in about $8.55 billion in net revenue -- 48.5% of the company's total. Broadcom's second-largest business, wireless communications, generated $5.40 billion in revenue (30.6% of the total). The enterprise storage segment took in $2.8 billion (15.9%), while the industrial and other segment accounted for $884 million in sales (5%).

One noteworthy point about Broadcom's wireless business is that it's heavily dependent on chip shipments to Apple. In fact, in its annual filing for fiscal 2017, Broadcom asserted that aggregate sales to the iPhone maker provided more than 20% of its net revenue.

That figure, Broadcom said, was up from "approximately 15%" in fiscal 2016.

Manufacturing strategy

As Broadcom pointed out in its most recent annual filing, "The majority of our front-end wafer manufacturing operations is outsourced to external foundries." That's how the company keeps its capital expenditures relatively small as a percentage of its revenue. Broadcom also "use[s] third-party contract manufacturers for a significant majority of our assembly and test operations. ..."

However, not all of its chip manufacturing is outsourced. In fact, the company says it uses its "internal fabrication facilities for products utilizing our innovative and proprietary processes, to protect our [intellectual property] and to accelerate time to market for our products."

"Examples of internally fabricated semiconductors include our FBAR filters for wireless communications and our vertical-cavity surface emitting laser-based and InP-based lasers for fiber optic communications," the annual filing reads.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple and is long January 2020 $150 calls and short January 2020 $155 calls on Apple. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.