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According to Cisco’s (NASDAQ:CSCO) latest available Annual Report (Fiscal Year 2010), the company has repurchased 3,127 billion shares from the time the company started its current stock buyback program in September 2001. Thus, CSCO has returned approximately $65 billion to its shareholders during the time period between September 2001, and July 2010. At first glance, this is an incredible return for the shareholders. At the start of Fiscal Year 2002 (August 2002), the company had approximately 7 billion shares outstanding. This translates into a theoretical $9 payout for ever shareholder. However, things are not as rosy as they might seem.

To a casual investor, if a company states that it has repurchased 3 billion of its own shares, based on the news headlines, it would imply that the number of shares outstanding has fallen by 3 billion. However, that is never the case as companies normally provide share based compensation to their employees, and might also issue additional shares for a variety of purposes. This is the case with Cisco. In an ideal scenario, average shares outstanding during Fiscal Year 2010 should have been 4.2 billion. Instead, the number of shares outstanding stood at 5,848 million. The table that follows provides the breakdown of the number of shares repurchased from for Fiscal Year 2002, through Fiscal Year 2010. All numbers shown are in millions.

Fiscal Year

Shares Repurchased

Average Shares Outstanding

Actual Change

Previous Year

Current Year

2002

124

7196

7447

-251

2003

424

7447

7223

224

2004

408

7223

7057

166

2005

540

7057

6612

445

2006

435

6612

6272

340

2007

297

6272

6265

7

2008

372

6265

6163

102

2009

202

6163

5857

306

2010

325

5857

5848

9

Total

3127

1348

As shown in the table above, although the company repurchased a total of 3,127 million shares, the shares outstanding decreased only 1,348 million. Based on the average price paid, there was a reduction of $26.6 billion worth of stock compared with the $65 billion worth of stock bought during the period. The dilution was primarily due to issuance of additional shares and stock-based compensation. As an example, during Fiscal Year 2010, the company bought 331 million shares (according to the Consolidated Statements of Equity) while issuing 201 million shares. The company also had a share-based employee compensation expense of $1.517 billion.

Although $26.6 billion is nothing to frown upon, it pales in comparison to the $65 billion paid out by the company and is very disappointing to me. As an investor (who generally invests for the long term), I believe that Cisco should limit its share buybacks in any given year to the sum total of the stock options granted and the additional shares issued. The excess amount can be returned to the shareholders in the form of dividends. The company declared its first ever dividend (6 cents a share) last month. This 1.4% yield is insufficient in my opinion. Based on the company’s projected long term growth rate of 10-15%, its existing cash balance ($40 billion) the company can easily pay a dividend in the 3-4% range, which will make the company attractive to dividend investors, supporting a rise in the stock price.

To be clear, Cisco is not the only company exhibiting the discrepancy of a significant difference between number of shares repurchased and the corresponding decline in shares outstanding. As an example, Microsoft (NASDAQ:MSFT) repurchased a total 2.07 billion shares during Fiscal Years 2007 through 2010. However, the share count dropped by 1.6 billion. Although better than Cisco, there is still a 22% variance between the repurchased and the actual reduction in shares.

Disclosure: I am long CSCO, MSFT.

Source: Cisco's Stock Buybacks Not As Rosy As They Seem