3 Reasons Investors Should Love Broadcom's Management
Technology giant Broadcom (NASDAQ: AVGO) has delivered a lot of value to its shareholders over the years, thanks to a growing portfolio of strong technology franchises, shrewd management of that portfolio, and a capital allocation strategy that is extremely shareholder friendly.
Broadcom wouldn't be where it is today without a highly capable and focused management team at the helm. To that end, I'd like to go over three specific reasons that investors should be happy with the individuals who are running Broadcom.
1. Extreme focus
Broadcom's strategy is a very simple one to articulate: It maintains a portfolio of best-in-class technology franchises and, when the opportunity arises, it uses its considerable financial wherewithal to augment that portfolio through acquisitions. Broadcom then processes the acquired asset -- keeping the parts that fit in with the company's overall portfolio strategy and then discarding the portions that simply don't.
While the strategy seems simple, a key strength of Broadcom's management team is that it sticks to the script. The company doesn't waste shareholder money on projects and businesses that have a relatively low chance of providing a financial return in the near to medium term. If Broadcom is interested in entering a market, it'll simply buy the market leader in that field.
What this ultimately means is that Broadcom runs a tight ship, spending exactly what it needs to ensure it's fielding best-in-class products to the customers that matter, but no more.
2. Shareholder friendly
Broadcom's management and board of directors is exceptionally shareholder friendly. The company's current capital return policy is to give back half of the free cash flow that it generated in the prior year during any given year. Since Broadcom's free cash flow has been growing at a rapid clip, this has translated into massive growth in the company's dividend.
Many other large and successful technology companies also pay dividends, but a number of of them tend to give back significantly less than half of their overall free cash flow generation in the form of a dividend. Indeed, it's not uncommon to see successful technology companies focus more on share repurchases than on dividends, as share repurchases can help a company report higher earnings per share (EPS) for a given level of net income. However, dividends put cash straight into shareholders' pockets, while share repurchases don't necessarily do so. (It's not uncommon to see companies announce and execute large buybacks when their share prices are on the decline.)
Put simply, Broadcom's capital allocation policy is very shareholder friendly and serves to make the stock attractive to more income-oriented investors.
3. Thinking ahead of the market
When Broadcom announced its acquisition of mainframe software maker CA Technologies, many in the investment community were left scratching their heads. The shares dropped significantly in value following the announcement of the deal, and many analysts at the time were quite negative, with downgrades seemingly pouring in.
Broadcom's management seems to have had the last laugh, though.
In hindsight, the deal looks very savvy. After some smart cost-cutting, it looks like CA Technologies is going to have quite a positive impact on Broadcom's bottom line, with management targeting at least $2.5 billion per year in operating profit from it. Given that Broadcom paid $18.9 billion for the company, and given Broadcom's strong track record on delivering on its acquisition promises, it won't be long before this deal has more than paid for itself.
Broadcom's management has consistently shown that it's not only competent, but that it's also often several steps ahead of the market. That kind of acumen is exactly what's needed to run a business that consistently delivers excellent financial results and shareholder returns over the long term.
Investor takeaway
Broadcom is a great company that's run by a phenomenal set of leaders. Ultimately, most investors don't have the luxury of being able to control the decisions that a company makes -- they need to trust that the management team in charge will make the best decisions possible to deliver solid shareholder returns. Given Broadcom's business performance, stock price performance, and excellent capital allocation policy, the company's shareholders should be able to sleep tight knowing that the business that they own a part of is in very good hands.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.