Please ensure Javascript is enabled for purposes of website accessibility

Broadcom Ltd. Announces $12 Billion Stock Buyback

By Ashraf Eassa – Apr 15, 2018 at 2:04PM

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

That's one way to return cash to stockholders.

On April 12, chip giant Broadcom (AVGO -0.43%) announced that its board of directors authorized a $12 billion stock buyback program. The authorization, Broadcom says, is "effectively immediately" and extends through November 3, 2019 -- the end of the company's fiscal year 2019.

In the press release announcing this share repurchase authorization, Broadcom Chief Financial Officer Tom Krause explained that the company is holding fast to its "policy of delivering 50% of trailing-12-month free cash flow to shareholders in the form of dividends while adding the ability to use the balance of our free cash flow not only for acquisitions but also for opportunistic buybacks."

Two large puzzle pieces hovering above a simulated city.

Image source: Getty Images.

Let's go over what this means for Broadcom's business. 

Share count goes down, earnings per share goes up

A key reason companies like to do stock buybacks is that it's an easy way to boost their reported earnings per share figures. Remember that earnings per share is calculated by dividing the amount of net income that a company generates in a given period of time (e.g. a quarter, or a year) by the number of shares outstanding.

Share buyback programs don't affect the total amount of net income a company generates (net income is a measure of business performance rather than a product of financial engineering), but they do affect the total number of shares outstanding. At worst, buyback programs serve to offset the natural increase in a company's share count thanks to things like stock-based compensation (tech companies often make liberal use of such compensation strategies), and at best, they can actually reduce the total number of shares outstanding, which boosts earnings per share. 

Broadcom's market capitalization is $99.73 billion as of writing, so a $12 billion share repurchase program implemented fully could substantially reduce the company's share count and meaningfully boost earnings per share. This is music to investors' ears.

It's worth noting though that Broadcom isn't saying that it'll definitely use up the entirety of the share repurchase authorization. That, in my view, isn't because Broadcom wants to announce a splashy, large buyback program to boost the stock with no intention of following through.

Instead, what Broadcom is doing is saying that as long as it doesn't have a better use for that cash (e.g., a juicy acquisition opportunity), it'll deploy it to repurchase stock and try to create shareholder value that way.

Foolish takeaway

Broadcom has generally been a good steward of its shareholders' money -- it pays a respectable dividend and carefully manages its business portfolio by buying great assets and divesting itself of ones that don't perform well.

Broadcom is also showing that it's seriously committed to acting in the best interests of its shareholders -- if it can't find anything better to do with the excess cash it generates (and, remember, Broadcom already allocates around half of its free cash flow to the dividend), it'll simply give it back to stockholders in the form of a share repurchase.

As usual, another good move from Broadcom.

Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom Ltd. 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 Ltd Stock Quote
Broadcom Ltd
$477.77 (-0.43%) $-2.08

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

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.