I was disappointed by the announcement on Friday that Cisco (NASDAQ:CSCO) would be paying a paltry $0.06 dividend that might not even continue perpetually. I expected a solid dividend ($0.10-0.15) to help assuage investor fears that Cisco is a has-been and help ensure significant value from their cash generation will be returned to shareholders. Also, investors need assurance now more than ever that Cisco will have their sights set on investor value and not helter-skelter acquisitions with growth being the only consideration. A major dividend could have been a catalyst to spark a rally from $17 to a more reasonable value.
Frank Calderoni, Executive Vice President & Chief Financial Officer of Cisco, stated in the press release that:
As the role of the network expands across the IT sector, Cisco's leadership position in the markets we serve is strong, and the time is right for Cisco to pay our first-ever cash dividend. This dividend complements our leading position, and is an important part of our commitment to bring value to shareholders.
Cisco still thinks that they are an agile technology company, when in fact they are an encumbered market giant that offers good products but can’t seem to grow through strategic acquisitions. The CFO is acting like this is some sort of revolutionary move that no one saw coming, when people were actually clamoring for a change like this for some time; value generation for shareholders of Cisco has been terrible since the turn of the millennium, and that stack of $35 billion looks awfully tempting for long term shareholders in the red.
Instead, we get a measly, minor dividend. It works out to about a 1.4% dividend yield when you factor in the recent share drop. If Cisco gets back to their mid-February levels of around $22 then the dividend looks even more paltry at 1.1%. Investors will compare this with competitors like Intel (NASDAQ:INTC) who offer 3.5%+ and Microsoft (NASDAQ:MSFT) who offers 2.5%+. Even IBM has them beat on dividend yield and they have also rewarded shareholders with a doubling in price over the last five years.
Chambers really missed an opportunity here to turn the momentum around on his stock. His management style is being questioned, the future of Cisco is being analyzed from every angle and he simply missed the boat on giving investors what they wanted. Huge stock option packages for their executives haven’t served to help investor relations, but to their credit Cisco has been aggressively buying back stock and have actually decreased share count over the last six months by about 2%. Why not put some of that cash into a more visible value generator in the form of a real dividend?
Here are some fellow big names that pay dividends, compared to Cisco.
Now, dividend payments used to carry the stigma that companies didn’t have enough opportunities for their cash. I find this logic archaic and outdated. Would you rather a company sat on $40 billion in cash in a low interest account, or put a sizable portion of that money to use in a value adding way. Just because you pay out a dividend doesn’t mean you can’t do something with the other billions of dollars.
Dividends and share repurchases are alternatives to the reckless acquisitions that management feels compelled to perform to sate Wall Street’s appetite for growth. I’d rather be given a cash payout than have the company overpay some twenty year old kid for his tech startup; yet, Wall Street might reward the company that performs the latter if they believe that start up will produce the unicorn of mergers… synergy! I have no time for “magic” value creation and would rather a stock price go up, or a dividend be paid.
Speaking of stock price increases, IBM has reinvented itself and their stock price reflects their innovation. Yet, even they pay a higher dividend than Cisco plans to pay. The dividend is not a death knell for tech companies, but rather a way for the stalwart and entrenched tech leaders to return value to an investor in a predetermined and accountable way.
You might also argue that some of these aren’t tech companies, but is Cisco still a tech investment in the truest sense of the word? They have a low PE and a huge market cap, so they hardly reflect the stereotypical small cap technology stock from the year 2000. It seems as though many aspects of technology are being commodified, so it may come as no surprise that CSCO has had trouble matching even market returns over the last ten years. If they can no longer match capital gains, then it is time to do something with that pile of cash other than sit on it.
I am an advocate of Cisco’s business and I think their valuation is astonishingly cheap right now. However, I based that on my assumption that they would reward investors with a significant cash payout in the form of a dividend. Without that, the bears who point to stagnant returns over the last ten years have a point.
The question is: when will Cisco’s stock price increase? Chambers missed an opportunity to provide the catalyst to counter negative sentiment surrounding Cisco by offering a significant dividend. Now, I’m not so sure what event can change the market mood surrounding this fallen titan.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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