Misguided Management, More Buybacks from Cisco (CSCO)

John Chambers is currently a misguided CEO.  We have been very vocal about the need for a dividend here, and the company has finally promised to initiate paying one.  Where Chambers is off the path is in the endless share buyback plan.  Now he has promised another $10 billion for share buybacks.

Last night the company announced a board-approved authorization of up to $10 billion in additional repurchases of its common stock.  The company had a remaining authorized amount of roughly $4.5 billion before the new announcement.  Really, what is the point?

Cisco’s board had previously authorized up to $72 billion in stock repurchases. There is no fixed termination date for the repurchase program.  Since September 2001 when the buybacks began, Cisco has bought and retired some 3.2 billion shares with an average price of $20.83 per share.  To date it has spent about $67.5 billion solely in buying its own shares.

What John Chambers does not get is that dividends are a far better return of capital to shareholders than these silly buybacks.  Look at the math offered up by the company and the truth speaks for itself.  Buybacks are effective if a firm plans to use its shares for a currency down the road if the current prices are undervalued.  The problem is that even if Cisco is undervalued it is not working to help.  Imagine if Cisco had paid all of that cash out to shareholders as a dividend for real income instead.

The company has made so many acquisitions and it has bought back shares to keep its employee stock option dilution to a minimum.  How is it working so far?  Pretty crummy.

We recently listed Cisco as a company to own for the next decade, with ten of those picks in total.  The basis was steady business opportunity and a new commitment to start paying shareholders.  If John Chambers and management will focus on the actual tasks at hand rather than continuing to waste cash in the manner it has, the stock price may finally act on its own.

Cisco is one of thirty of the Dow Jones Industrial Average members.  Is it really too much to ask for the company to start acting like one?  The most recent warning after earnings on guidance may be true in a systematic sluggishness and slow government spending, but there are some company-specific issues that Cisco probably needs to come to grips with.

Shares are up almost 1% at $19.80 on the news.  Hardly an endorsement.

JON C. OGG