Broadcom Buyback Raises Hackles

A $500 million repurchase won't offset even half of options issuance.
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Broadcom

(BRCM)

fans cheer a blowout quarter and big product cycles still ahead, but some don't see all the success reaching the shareholders.

The communications chipmaker

posted an 18% sequential jump in fourth-quarter sales Thursday, sending the stock up 20% in heavy trading Friday. An insatiable demand for broadband chips and components not only helped fill up orders in the fourth quarter, but left enough for executives to boost sales guidance for the current period.

The bulls are encouraged by the three consecutive quarters of top-line gains and by the relatively early stages of growth in products like portable media players, satellite TV set-top boxes and Bluetooth wireless connections. The prospects look even better when you consider potential supplies to the 3G phone market and big buzz categories like Internet protocol TV.

But even as the business seems poised for a strong run, the stock could lose a little traction as investors absorb the dilutive impact of all the shares the company is issuing as pay for executives and employees.

Last year, Broadcom issued 24.2 million shares to employees. After spending $154 million on buybacks, the company reduced the dilution to about 20 million shares. To help offset the stock giveaway, Broadcom said it will boost its buyback efforts by spending an additional $500 million starting next month on repurchasing shares.

But as accounting gadfly Albert Meyer of 2nd Opinion Research points out, siphoning off a half billion of the company's cash at recent prices will buy back just 8 million shares -- little more than a third of the total issued to employees in the last year alone.

"A fifth grader will tell you that the $500 million the company boasts it will spend on stock repurchases falls woefully short of mopping up the dilutions caused from stock-based compensation," says Meyer.

Meyer and others have been critical of buybacks at other Silicon Valley outfits like

Cisco

(CSCO) - Get Report

, arguing that the buybacks

line executives' and workers' pockets at the expense of shareholders.

"The $500 million that the company will be spending does not create shareholder value," says Meyer. "It is a compensation expense."