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Cisco Goes Buyback Happy

Light Reading
News Analysis
Light Reading
9/24/2003

Cisco Systems Inc. (Nasdaq: CSCO) appears to feel that sometimes the best thing you can do is invest in yourself. This week its board has authorized the company to buy another $7 billion of its own common stock, with no expiration date. As of July 26, 2003, the company had repurchased and retired 548 million shares of Cisco common stock for an aggregate purchase price of $7.8 billion.

Since Cisco started its share repurchase program in 2001, the company's board has approved up to $13 billion to be used in stock buybacks. Here's a quick recap of the activity so far:

  • September 2001: Cisco board approved the repurchase of up to $3 billion of Cisco common stock.

  • August 2002: Cisco's board extended the buyback program by an additional $5 billion.

  • March 2003: Cisco's board again increased the buyback program by another $5 billion, with no termination date.

  • September 2003: Cisco board ups the ante a third time; it approves another $7 billion in additional repurchases of the company's common stock with no termination date.
Why is Cisco doing what it's doing? There are several possible reasons. Here's the lowdown on stock buybacks:

  • Buybacks can be an efficient way to distribute cash and help maintain the value of equity for the investors. Unlike cash dividends that are distributed to investors, buybacks are taxed at a lower rate. In Cisco's case, last November its shareholders defeated a proposal requesting the declaration of a quarterly dividend. Cisco says it didn't receive a shareholder proposal requesting dividends this year.

  • Buybacks are good publicity. Just because Cisco is allowed to buyback some $13 billion worth of its own shares, it is not obligated to do so. However, Cisco's buyback history shows that the company generally views its buyback program as more than just a marketing maneuver.
  • Buybacks can boost the value of a stock by increasing demand. When investors sense that a company believes in its own fundamentals enough to buy shares -- and when the company sits on the sidelines with billions of dollars on hand ready to buy the stock -- it may encourage new investment.
  • By reducing dilution, stock buybacks can sometimes make the company's earnings per share increase. "A stock repurchase program provides the company with a flexible use of cash, which is important in a changing business environment," says a Cisco spokesperson. "By repurchasing stock, Cisco is able to return value to its shareholders. At current price levels and interest rates, the stock repurchase is not only accretive to earnings, it also helps to decrease shares outstanding and minimize the impact of dilution from acquisitions and stock options."

    There are some who contend that Cisco's stock buybacks aren't enough to offset dilution of stock through the issuance of employee options. The total number of Cisco shares outstanding has dropped in the past three years, but it is still 54 percent higher than it was 10 years ago, according to Morningstar.com.

    Some other tech companies have taken a different approach to distributing cash and managing employee options. For example, Microsoft Corp. (Nasdaq: MSFT) has decided to halt the issuance of employee stock options; it will expense any options it's already given out and is paying a dividend. Cisco keeps its earnings well above what they would be otherwise by not expensing options (see Cisco's Chambers Gets More Options).

    What, then, is Cisco going to do with its cash? "Our ongoing plans to use our cash include among other things: continued repurchase of shares, strategic minority investments to gain access to new technologies, and potential acquisitions," a Cisco spokesperson says.

    Cisco certainly picked an interesting day to announce a stock buyback. Today, as the Nasdaq Composite Index fell more than 3 percent, Cisco shares fell $0.83 (3.92%) to $20.32.

    — Phil Harvey, Senior Editor, Light Reading

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    lightreceding
    lightreceding
    12/5/2012 | 2:47:05 AM
    re: Cisco Goes Buyback Happy
    for stock buy backs is to reduce the earnings dilution caused by the excercising of employee stock options. Cisco is very big on employee options (especially for top management) and they treat them as if they have no cost but they cause earnings dilution. This article is full of Cisco public relations fluff and ignores this important reason for buybacks, which are common at companies that have stock option programs. Chambers gets press for taking a $1 paycheck, if he really cared about the bottom line he would give up his options and those of top management.
    gumbydammit
    gumbydammit
    12/4/2012 | 11:23:41 PM
    re: Cisco Goes Buyback Happy
    Uh Phil...
    I think the buyback was announced *yesterday* afternoon. They didn't wait to see the market fall 4% to spring in on everyone! The two are not related.

    They can use the buyback for other purposes as well, such as adding to employee stock options, and manipulating employee stock purchase program prices, among other things.

    I'm sure it will definitely help keep the stock price stable, surely you don't have any problems w/believing in your own company's future?

    Good day,
    /gd.
    digerato
    digerato
    12/4/2012 | 11:23:41 PM
    re: Cisco Goes Buyback Happy
    With 7 billion shares outstanding, a 650 million share buyback (if all $13Bn were spent at $20/share) is a drop in the ocean. There are 6.9 *billion* Cisco shares outstanding. So you're talking about retiring approx 9% of the outstanding shares. Except that you won't retire that many shares because of all the outstanding stock option grants. So you spent $13Bn and don't have much to show for it.

    If it isn't already, Cisco needs to think about taking a leaf out of (gasp!) Microsoft's book. $13Bn in dividend payout across 6.9 billion shares is $1.88/share. Not too shabby. Of course, you'd need to re-think the employee stock option plan and consider an employee stock plan -- again, as MSFT has done.

    That way you'd be rewarding employees -- and shareholders -- for company profitability (that's where the dividend comes from) rather than stock price alone. What a concept! Cisco is already a staggering profit engine, and that's where the corporate focus has been for the last 18 months, so you'd even be aligning employee incentives with those of shareholders.

    Digerato
    bien64
    bien64
    12/4/2012 | 11:23:40 PM
    re: Cisco Goes Buyback Happy
    From the numbers in the story it seems like Cisco paid an average of $14.24 per share vs. the close today at $20.32. Isn't that a net gain of $3.3B for Cisco which they can use for an aquisition with stock they bought back? I'd take a 42% return any day...
    skeptic
    skeptic
    12/4/2012 | 11:23:40 PM
    re: Cisco Goes Buyback Happy
    I'm sure it will definitely help keep the stock price stable, surely you don't have any problems w/believing in your own company's future?
    ------------
    In my opinion, buybacks are utterly useless.
    There is a perception that buybacks raise
    stock prices, but I've never actually seen it
    work out that way. The market for stocks like
    this is just too large and too dynamic for even
    a large buyback to have much effect.

    Even with the taxes, I would perfer dividends.
    At least its clear where the money is going
    as opposed to the buyback pour-it-down-the-drain
    -and-hope-for-the-best strategy.
    skeptic
    skeptic
    12/4/2012 | 11:23:35 PM
    re: Cisco Goes Buyback Happy
    From the numbers in the story it seems like Cisco paid an average of $14.24 per share vs. the close today at $20.32. Isn't that a net gain of $3.3B for Cisco which they can use for an aquisition with stock they bought back? I'd take a 42% return any day...
    -------------
    As far as know, the bought-back shares cease
    to exist. Cisco can choose to issue new shares
    for a variety of reasons any time it wants,
    but there isn't any measurable "net gain"
    associated with the buyback transaction.

    The buyback is more effective if the share
    price is lower (more shares at a lower price),
    but there is no "gain" for the company.



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