AVGO is undervalued relative to its strong earnings growth; the speaker is adding to his position.

If you have been following the channel for a while, you know that I have performed excellently with Broadcom stock, which I have held in my investment portfolio for a long time.

If you look at this stock in my growth chart, you will find that I have made a profit of approximately 198% based on the stock's average value. Based on the value of my original shares, I made a profit of approximately 600% .

So, when you look at a stock like Broadcom and notice that it has risen by 645% over the past five years, you might think that you have missed the opportunity. At least, that's what our investment inclination drives us to do.

However, if we look closely at the company's details, we will find evidence of the strength of its business quality, its continued strong growth, and its reasonable valuation, all while it continues to increase its dividend payouts.

Now, going back to Broadcom, we find another example where the initial return is low, but look at the compound annual growth rate of dividends over 10 years. It's 26%, and what's really amazing is that the compound annual growth rate of free cash flow over 10 years is 31.62%.

It's an amazing growth in every sense of the word. This is a sustainable growth in dividend payouts because the free cash flow has grown sustainably. Therefore, it is clear that I am impressed with Broadcom from a dividend distribution perspective.

At first glance, it seems perfectly suited to an investment portfolio focused on dividend growth , but of course, the concern lies in the valuation. This is a stock that has risen by 650% in the past five years.

However, last month we saw a slight decline in Broadcom's share price, which fell by about 14%. So, we are talking about billions of dollars in market value that have eroded. What is really interesting is that they recently released their earnings reports for the last quarter , in which they actually performed better than expected in both revenue and profits; But they lowered their forecast for the next quarter very slightly , and that is essentially what caused this sharp drop in the stock price within one month.

But the irony is that CEO Hock Tan spoke during the earnings call about positive developments within the company. Perhaps most interestingly, he stated that as a result of these positive developments, the company is expected to exceed its target of achieving $30 in earnings per share in fiscal year 2028.

So, we now have a point of reference. Their goal is to achieve $30 in earnings per share in fiscal year 2028, and he currently expects the company to exceed that level of earnings.

This is extremely important information, as it allows us to build a financial model to determine the true value of the stock in approximately 2028, and what our expected returns will look like at that level.

So, if we move to our sensitivity analysis model and look at Broadcom, we find that the baseline number they give us is for 2028. That's what we build our model on up to that year , and try to predict potential returns.

So, what would it actually take to reach $30 in earnings per share in 2028? Let's take a few things into consideration. Analysts, on average, expect a compound annual growth rate for earnings per share of around 31.76% through 2030.

This implies very strong earnings growth, with impressive growth in 2026, 2027, and even 2028. However, you will notice that earnings growth is expected to begin to slow down gradually thereafter.

The expected rate of profit growth remains very high, no doubt about it, but only compared to previous years. Therefore , we need to take that into account when forecasting the future earnings multiple.

Now, let's begin. What will it take to reach $30 per share by 2028? Well, if we expect a 20% growth in profits, we certainly won't reach that goal. And if we expect 30%, we won't reach it either.

And if we expect 40%, we won't reach it either. And at 50%, we won't reach it either. At 60%, we will start getting very close. This is the compound earnings growth rate that management is targeting over the next few years, and remember that they have stated that they expect to exceed this rate.

In fact, I believe the stock will trade at a lower price-to-earnings ratio in the future as earnings growth slows. This is perfectly normal and logical . So, what is the price-to-earnings ratio at which the stock is currently trading?

Well, if we look at the price- to-earnings ratio for the past twelve months, it will look scary at first glance, as it reaches 47. But remember, this is a multiple for the past twelve months.

Based on future projections, it has fallen to only 21.3. The price-to-earnings ratio is only 21.3. What's even more interesting is that if we exclude the price- to-earnings multiple for the past twelve months and look at Broadcom's valuation multiple over the past three years , we find that it's trading at one of its lowest valuations since 2023 or early 2024.

I don't see anyone in the financial media talking about this right now. Therefore, although earnings growth is expected to be enormous over the next three years, the company is trading at a very reasonable valuation multiple.

Even if the price-to- earnings (P/E) multiple for the past twelve months rises significantly to around 25 compared to the current multiple of around 45.7, the expected compound return by 2028 will still be 26.3%, i.e., a 100% return, taking into account that this does not include the small dividends that will be received during this period.

Even if we reduce the price-to-earnings multiple for the past twelve months to 20, future returns will still be very attractive. This would give the company a share price of $594.

Therefore, I believe Broadcom shares are trading at a very reasonable valuation considering the speed of their earnings growth over the next three years. This is why I am increasing my Broadcom equity in my personal portfolio as these profits grow.

As free cash flow continues to grow, we will see dividend payouts grow at a high, double- digit rate. However, what we must bear in mind is that we will see sharp fluctuations in this type of investment. I will address this matter again shortly .

Yes, this is a dividend-paying growth stock . But honestly, if the price-to-earnings ratio had fallen that much, I would have added more shares.

As with Broadcom and ASML, one tends to look at SCHD and note that its total return on equity has increased by approximately 27% to 28% over the past year, and also since the beginning of the year, where it has increased by roughly a similar percentage .