Please ensure Javascript is enabled for purposes of website accessibility

Broadcom Readies Billions for "Opportunistic Buybacks"

By Daniel Sparks – Updated Apr 13, 2018 at 8:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here's what investors should know about Broadcom's $12 billion authorization.

Semiconductor supplier Broadcom (AVGO -1.37%) was more than ready to make a major acquisition earlier this year, offering to purchase Qualcomm (QCOM -1.20%) in a staggering deal valued at more than $100 billion. But management's tone has shifted. While a large acquisition still could be in the cards for Broadcom, management is adding another option for its free cash flow: buy back $12 billion worth of its own stock. 

Broadcom said on Thursday that its board had authorized up to $12 billion for repurchases of its common stock. The authorization is effective immediately and lasts until Nov. 3, 2019. The repurchase program gives Broadcom the ability to use its free cash flow "not only for acquisitions but also for opportunistic buybacks," said Broadcom CFO Tom Krause in a press release on Thursday.

A woman holding a smartphone

Image source: Getty Images.

Taking a breather

The aggressive share-repurchase authorization follows Broadcom's drawn-out attempt to acquire Qualcomm. The attempt began in November of last year and extended to March 14, 2018, when Broadcom withdrew its offer to acquire Qualcomm following President Trump's executive order to block the takeover due to national security concerns. 

Broadcom's aggressive efforts to purchase Qualcomm made for quite a frenzy, featuring nearly 20 press releases. In addition, the acquisition attempt took place just as Qualcomm was trying to purchase NXP Semiconductors N.V. Adding to the noise, Intel reportedly was ready to make an offer to buy Broadcom. 

After so much of management's energy was spent on a failed takeover attempt, Broadcom may be reconsidering other capital-allocation strategies.

Seeking out the highest returns for shareholders

Broadcom's Thursday announcement that it authorized $12 billion for repurchases represents a marked change in the company's strategy for capital allocation, which previously prioritized acquisitions for any free cash flow beyond the 50% it said it planned to pay in dividends.

In Broadcom's first-quarter earnings call last month, management said its overall approach to allocation of its free cash flow was to pay 50% of it in dividends and to use the remaining amount on acquisitions, repurchases, or debt payments, depending on which area offered the highest return on investment. At the time of the call, Krause said acquisitions were the most attractive option: "As you all know, Hock and I are quite familiar with the industry landscape and, sitting here today, we do see potential targets that are consistent with our proven business model and that also can drive returns well in excess of what we would otherwise achieve buying our own stock and/or paying down debt."

Recent stock-price volatility may have influenced Broadcom to be better prepared to capitalize on opportunities to buy its own stock at a discount. Broadcom's stock was trading above $260 in the days leading up to its first-quarter earnings report, but then fell to as low as $228 earlier this month. Shares are now trading at $239.

Whether Broadcom ends up using its excess free cash flow beyond dividend payments to make a large acquisition, repurchase shares, pay down debt, or a combination of these activities, it's good that management is considering different options in an effort to maximize returns for shareholders. Further, the fact that Broadcom can even authorize such an aggressive repurchase program while continuing to scan for acquisition opportunities highlights the company's strong financial health. Broadcom raked in $5.5 billion in free cash flow in fiscal 2017, up from $2.7 billion in fiscal 2016, and its trailing-12-month free cash flow was $5.9 billion. 

Investors seemed to like the news of Broadcom's repurchase authorization, as shares were up more than 4% in after-hours trading at the time of this writing.

Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Broadcom Ltd, Intel, and NXP Semiconductors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Broadcom Limited Stock Quote
Broadcom Limited
AVGO
$462.26 (-1.37%) $-6.42
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$119.74 (-1.20%) $-1.45

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.