Broadcom’s capital allocation strategy
Previously, we saw that Broadcom (AVGO) has been growing its FCF (free cash flow) steadily by acquiring companies with high cash flow. The company’s strategy is to increase its cash flow and give returns to shareholders through dividends, buybacks, and strategic acquisitions. In November 2017, Broadcom tried to acquire Qualcomm (QCOM) but failed, resulting in it compensating shareholders by announcing a $12 billion stock buyback in April.
Broadcom’s capital allocation policy is to spend 50% of its trailing 12-month FCF on dividends, and the remaining FCF on acquisitions and buybacks. The policy does not obligate the company to buy back a certain number of shares or pay a dividend for a fixed period.
At the end of fiscal 2018, Broadcom had returned $10.25 billion to shareholders, of which $3 billion was in dividends and $7.25 billion was in stock buybacks. The company returned more than 100% of its FCF—$8.24 billion—to shareholders in fiscal 2018.
On December 6, Broadcom increased its quarterly dividend by 51% to $2.65 per share, which equates to an annual dividend payment of $4 billion. The company increased its dividend as its trailing 12-month FCF increased to $8.2 billion. It expects its fiscal 2019 FCF to increase to $10 billion, which would see another increase in dividends at the same time next year. However, the company will decide on the dividend amount after looking at its fiscal 2019 FCF.
After paying dividends, Broadcom allocates its FCF to fund acquisitions while maintaining an investment-grade credit rating. The company uses the leftover FCF for opportunistic buybacks. The company makes buyback decisions depending on its stock price, business and market conditions, and alternative investment opportunities. In fiscal 2018, the company announced a $12 billion buyback after the blocking of its Qualcomm acquisition dragged down its stock.
Considering its higher FCF, Broadcom plans to allocate an additional $8 billion on stock buybacks in fiscal 2019. Next, we’ll look at the company’s strategy for its new acquisition, CA Technologies.
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