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Cisco appears to be running out of money for stock buybacks

Ominously for shareholders, Cisco's share count has been growing quarterly.

Hummelstown, PA:   Sun, 8/18/13 - 11:59pm    View comments
 

CiscoAlarmingly for Cisco's shareholders, during FY13 Cisco spent the least amount of shareholder money ($2.8 billion) on repurchasing Cisco's stock, since its stock buyback program began 12-years ago.
 

So exactly why should Cisco's shareholders be alarmed?
 

Mark SueWell, because RBC Capital Markets Managing Director Mark Sue made several interesting points last week:
 

"Cisco has historically used its share repurchase programs to reduce its diluted share-count to good effect, in addition to negating the impact of stock-based compensation related to RSA/RSU issuance. However, since the advent of the dividend, Cisco has decelerated the pace of its share buyback program.
 

"Considering that Cisco has to repurchase shares to negate the shareholder dilution related to stock-based compensation, we believe that Cisco may have limited room to service a dividend yield above the current 2.7% levels without further impacting its buyback program and diluted share-count, unless Cisco spends materially above the 50% of free cash flow levels.
 

"Cisco we believe will be a meaningful dividend payer but not increasingly a dividend grower if it were to try to actively offset its share-count increase."
 

Cisco's share count has been growing quarterly:

   
Year Dollar Amounts
of Cisco Stock
Buybacks
by Fiscal Year
2014* $ 6.0 billion
2013 $ 2.8 billion
2012 $ 4.4 billion
2011 $ 6.791 billion
2010 $ 7.803 billion
2009 $ 3.600 billion
2008 $10.350 billion
2007 $ 7.781 billion
2006 $ 8.295 billion
2005 $10.200 billion
2004$ 9.100 billion
2003 $ 6.000 billion
2002 $ 1.853 billion

Total $ 84.9 billion
*First 6-months of FY14

Source: U.S. Securities and Exchange Commission

Cisco's share count has been growing quarterly
Source: U.S. Securities and Exchange Commission
 

Cisco's Annual Stock Buybacks and Dividend Trends ($, M)

Cisco's Annual Stock Buybacks and Dividend Trends ($, M)
Source: Mark Sue - RBC Capital Markets
 

Cisco's Quarterly Stock Buybacks and Dividend Trends ($, M)

Cisco's Quarterly Stock Buybacks and Dividend Trends ($, M)
Source: Mark Sue - RBC Capital Markets
 

For the first time in 8-years, Cisco's diluted shares outstanding grew on an annual basis.

Cisco's Annual Diluted Shares Outstanding Trends (Units, M)

Cisco's Annual Diluted Shares Outstanding Trends (Units, M)
Source: Mark Sue - RBC Capital Markets
 

Drivers Behind Cisco's Diluted Shares Outstanding Trends (Units, M)

Drivers Behind Cisco's Diluted Shares Outstanding Trends (Units, M)
Source: Mark Sue - RBC Capital Markets
 

Sue continued, "To understand Cisco's ability to service its quarterly dividend of $0.17 (annual dividend of $0.68), while continuing its stock buyback program, we conducted a scenario analysis of the total cash that Cisco could potentially return to shareholders at various levels of dividend yield and annual share buyback. Investors should note that we're estimating ∼$12.5B in free cash flow in FY14 and that Cisco has indicated that it will return at least ∼50% of its free cash flow back to shareholders."

Scenario Analysis for Cisco's Annual Cash Returned to Shareholders ($, M)

Scenario Analysis for Cisco's Annual Cash Returned to Shareholders ($, M)
Source: Mark Sue - RBC Capital Markets
 


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