Broadcom Ltd (AVGO) will report its fiscal Q4 results on Dec. 8 for its year ending Oct. 31. Investors expect the semiconductor company will hike its dividend due to its huge free cash flow. This makes AVGO stock attractive to value investors especially given how cheap it is now. Its options are also cheap as a result.

Broadcom has raised its dividend annually for the past 10 years and it has now made 4 quarterly dividend payments. This is why investors expect the company will likely raise the dividend with its annual results on Dec. 8. Last year it raised the dividend by 13.9%. 

Higher Dividend Raises the Target Price

Even if it only raises by 10% the new quarterly dividend goes from $ $4.10 to $4.51 per share or $18.04 annually. So at today's price of $485.35, this gives it a dividend yield of 3.71%. This is important since the stock's average annual yield over the past 4 years has been 3.23%. In other words, AVGO will be trading at a discount to its average yield.

For example, if we divide $18.04 by the average yield of 3.23%, we get a target price of $558.51 per share. That represents a potential 15% or more gain in the stock price. Moreover, if the company raises the dividend by 13% to $4.63 per quarter or $18.52, the new yield will be 3.815%. That raises the target price to $573.37, or 18% over today's price.

Free Cash Flow Is Still Strong

And it's not like the company can't afford to raise the dividend. Last quarter Broadcom reported strong free cash flow (FCF) of $4.3 billion with an amazing FCF margin of 51%. That means that over half of all the company's sales went straight to the bottom line of its cash pile, after all expenses, working capital requirements, and capital expenditures.

Moreover, the dividend costs only $1.736 billion, or just 40% of the available FCF. It used the rest of the FCF to buy back stock - $1.5 billion worth of shares and eliminated 2.6 million shares or 0.6% of its 435 million diluted shares. At that pace it will reduce its buyback of shares annually works out to 2.4% of its market value. This buyback activity allows the company to keep raising its dividend per share at the same cost.

Options Look Cheap

As a result, AVGO's call options look cheap, especially if the $573 stock price target above works out in the next 2 months or so. For example, the Dec. 9 calls (one day after the earnings come out) show that the mid-price for the $515  strike price calls is trading for just $10.05 per contract.

That means that the breakeven price is $525.05 per share. Granted this is 8.1% over today's price, but if our target price range of $558 to $573 works out, given the forthcoming dividend announcement, there is plenty of room for profit.

Even if the dividend announcement is not as generous as we expect, AVGO stock should likely do well given how cheap it is now. For example, its forward P/E multiple for next year is just 11.7x, according to Seeking Alpha. That is well below its 5-year historical forward average of 14.4x, implying a potential 23% upside just to get back to its average multiple.

Nevertheless, if a recession hits, all bets are off. But the worst news seems to be already priced in AVGO stock now. That is why its call options look attractive now.

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