Cisco and the Dividend: Out of Every Single Last Excuse (CSCO, JNPR, ALU)

Cisco Systems  Inc.(NASDAQ: CSCO) is on the verge of its analyst meeting taking place today.  The company is out of excuses and the time to pay a dividend is now.  Considering a dead decade for stocks, John Chambers either needs to learn to pronounce cash-flow better than “caishe-slow” or he needs to man-up, get the corporate checkbook out, and go spend some of those billions of dollars to reward holders with a long-overdue dividend.  The difference between GAAP and non-GAAP earnings per share is $0.44 EPS and $0.33 EPS.

If Cisco decides that it should pay a quarterly dividend, it could simultaneously put the heat on competitors like Juniper Networks, Inc. (NASDAQ: JNPR), Alcatel-Lucent (NYSE: ALU), and others that are currently also not paying out quarterly payments.  Imagine if rival companies that are the smaller companies trying to be “The Little Ciscos” had to actually run at profit levels that they too had to pay a dividend to reward their shareholders.  This would give Cisco a distinct advantage in its best-in-class status for shareholders.

In the last quarter Cisco repurchased 99 million shares at an average price of $23.33 per share with about $2.3 billion; during all of fiscal-2010 it repurchased 325 million shares at an average price of $24.02 per share for a total of $7.8 billion.  All said an done in its buyback history: Cisco has repurchased 3.1 billion shares at an average price of $20.78 per share for a total of about $65.0 billion.

At the end of the last quarter, Cisco said that its cash and cash equivalents and investments were $39.9 billion.  Times being “Unusually uncertain” be damned!  Barron’s said a 40% traditional payout could yield 3.4% and that a 70% payout could yield 6.2% now.  While we think tech is not the growth engine it was before, and paying less than 40% of the firm’s income should be ample here to get things going in the right direction.  More importantly, Cisco should pay out $3.00 per share (approx. $17.1 billion total) as a special dividend and declare a regular dividend for approximately 30% of its GAAP income for the time being.  That one-time dividend if paid in 2010 will come with the lowest tax implications potentially ever again for its holders.  It can always raise its regular payout thereafter if it decides, but this should give more than enough growth and acquisition capital to keep funding its growth.

Cisco’s Fiscal-2010 earnings were $1.33 EPS on a GAAP basis and $1.61 EPS on a non-GAAP basis.  If Cisco’s remains this stodgy on no payouts, perhaps Wall Street analysts should just start telling the company that it will only be evaluated on a GAAP basis since its non-GAAP basis has not helped its shareholders.  Its trailing P/E ratio based upon Monday’s close up 3.1% at $21.26 is only 13.2 on a non-GAAP basis that Wall Street uses. That is cheap compared to Cisco’s history.  If Cisco does not get on the dividend bandwagon here, then we are going to cease using non-GAAP measures to evaluate any of the company’s numbers.  On a GAAP basis, Cisco’s trailing P/E would be nearly 16.  Suddenly, that doesn’t sound too cheap… does it?

By the way, Cisco is now a member of the Dow Jones Industrial Average and it has been a member since 2008.  Guess how many DJIA components do NOT have a regular dividend… ONE, and it is Cisco.

Dear Mr. Chambers, “You owe your holders a dividend after this long and it is time to finally pay up.  It has been several years ago that you fessed up that Cisco’s growth would revolve around GDP growth. All those share buybacks have merely kept Cisco from being too diluted per share because of your employee stock options that made all those millionaire employees and for your private company acquisitions.  Cisco is the biggest technology utility for all communications and its margins are massive.  Your company is now a DJIA component, and those companies are supposed to pay a dividend.  It is about time and there is no time like the present.”

JON C. OGG