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.