Broadcom (AVGO): Massive Share Repurchase Program Likely to Boost Investor Confidence

Nomura's Romit Shah views Broadcom's $12 billion share repurchase program as a sign that small-scale M&A and driving shareholder returns are in focus.

Broadcom (NASDAQ:AVGO) has unveiled the initiation of a $12 billion stock repurchase program effective immediately through the end of the company’s fiscal year 2019, and one bull sees this as a move to bolster positive investor sentiment. After all, investor confidence has been a bit rocky lately after AVGO’s story has been plagued by failed attempts for a revolutionary M&A move forward.

Nomura analyst Romit Shah takes the buyback move as a key sign this chip giant has its eyes on “small-scale M&A,” and these share repurchases could prove to be “an incremental tool for shareholder returns.” Bullish on an evolving narrative for AVGO to one intent on generating organic gains, diversifying revenue, boosting shareholder capital returns, and angling for small scale M&A deals, Shah wagers the $12 billion share repurchase further strengthens this story.

As such, the analyst reiterates a Buy rating on AVGO with a $300 price target, which implies a close to 20% upside from current levels. (To watch Shah’s track record, click here)

“Amid investor skepticism, today’s share repurchase announcement reinforces Broadcom’s commitment to ‘tuck-in’ M&A and shareholder returns, in our view. In our note from Monday, Do As You Say, we discussed how Broadcom’s investment narrative is shifting after recent unsuccessful attempts at transformative M&A. We believe some investors though have been skeptical, questioning Broadcom’s ability to grow organically, generate diversified revenue growth, and their commitment to tuck-in only acquisitions. We noted a large share repurchase program would likely help to shore up investor confidence that Broadcom is indeed committed to small-scale M&A and driving shareholder return,” asserts Shah, upbeat on the company’s dividend in light of the news.

For fiscal 2018, the analyst forecasts the repurchase program could add around $0.55 to AVGO’s EPS, jumping up to $2.00 to $2.50 in EPS by the next fiscal year. Additionally, Shah projects the buybacks will lessen Broadcom’s cash balance to $3.6 billion by the close of this fiscal year compared to his previous expectations calling for $10.7 billion. In terms of capital returns to shareholders, the analyst bets AVGO could realize a total of $10.3 billion in fiscal 2018 and $8.2 billion come fiscal 2019.

In a nutshell, “While AVGO may no longer be pursuing large scale M&A in the near future, we believe the company remains committed to smaller, tuck-in M&A within the $5bn (+/- a few billion) range,” surmises Shah, who cheers that this tech player is “walking the walk.”

Broadcom is a shining stock on the Street, according to TipRanks analytics. Out of 23 analysts polled in the last 3 months, a resounding majority of 22 rate a Buy on AVGO stock with just 1 maintaining a Hold. The 12-month average price target stands tall at $322.38, marking a solid nearly 35% upside potential from where the stock is currently trading.  

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