Albert Meyer

Cisco: Despite Difficult Year, I Smell Value

Michael, thanks for the response. Your research will show that the company spent $50 billion (rounded) over the past 12-years to repurchase 2 billion shares (rounded). During the same period, it issues 2 billion shares (rounded) to employees and collected about $20 billion (rounded) in exercise proceeds, for a net cash outflow of $30 billion (rounded). It is doubtful whether the company produces $30 billion in free cash flow the past 12 years, especially if you include some of the small R&D-related acquisitions.

So, most if not all of the company's free cash flow goes to buying back stock issued to employees, which is disguised compensation in my book. Management would want you to believe that stock-based compensation is a non-cash expense and that buying back stock returns cash to investors. How stupid.

This company is a great cash cow for employees, but no good as an investment for long-term investors. There are still over a billion options awaiting exercise. The last time I checked (2008), the CEO’s compensation, cash and gains from option exercises, averaged $50 million per annum the past five years. The stock underperformed the S&P with a negative return during the same period. For those who invest in mutual funds, if your fund owns Cisco or any of these stock-option laden companies, the fund manager doesn’t have a clue.

Cisco: Despite Difficult Year, I Smell Value

Dick Black has the right perspective.

Michael, please explain to us the accumulated deficit of $843 million on Cisco's April 26, 2008, balance sheet. The balance sheet now shows a $3.2 billion retained income number, but still woefully low for a company that ostensibly earned tens of billions of dollars in net income the past ten years, but paid no dividend.

Cisco: Compelling at These Levels

"but buybacks have not even been sufficient to offset dilution from options granted to employees."

Thanks for the response, Asif. Do you agree that cash spent on buying back stock issued to emloyees is paying compensation through the back door, hence such expenditures should be deducted from free cash flow, after which there is not much left. The balance sheet reflects it correctly and sets it off repurchases against retained income, thus there is very little in accumulated or retained earnings after more than 15 years of being a "profitable comany."

Cisco: Compelling at These Levels

Thanks PrudentInvestor for some common sanity in this debate.

You'll notice I asked Asif to tell us how much Cisco has accumulated in profit the past 15 years (still waiting)... in $ billions... no such luck. The company spends all the profit it books to repurchase the stock it dishes out to employees.

Asif should not to talk about dividends and buybacks in the conventional sense. After buying stock to fight the dilution coming from option exercise, there is no cash left for dividends. Sorry, Cisco shareholders, you will never see a dividend.

There is no benefit to shareholders when you inflate the share count with stock issued to employees and then you buyback that stock. FASB hasn't figured it out but for dummies like us, when you buy back the stock you've issued to employees you are paying compensation through the back door - forget about Black-Scholes... as Holmann Jenkins of the Wall Street writes... FASB 123R produces "junk numbers." Just folow the cash, you can't go wrong. Stay away from Cisco, unless you in it for a trade... more than one billion options coming down the pike... 20%+ dilution. You are not investing, you are bailing out excutives and monetizing their options.

If your mother-in-law's owns Cisco, tell her to sell the fund. The manager has no clue. That goes for all these stock option laden companies.

Asif, are you still bullish on Cisco?

On Apr 09 08:11 AM prudentinvestor wrote:

> Asif,
>
> Like many companies nowadays, they are managed for the benefit of
> executives and employees, not shareholders.
>
> They buy back stock to give their employees and to boost the price
> for the benefit of their executives' options. If the shareholders'
> money wasted on overpriced buybacks does not suffice to boost their
> options, they re-price underwater options, like Google just had the
> gall to do!
>
> Meanwhile, shareholders get diluted and receive no dividends, just
> wait for the "greater fool" to pay them a higher price.
>
> Boards are mostly stuffed with "good-ol-guys-and-gals", all they
> want is to stay on the board for the pay and perks, without regard
> to shareholders' interests. Most real shareholders do not vote or
> even know which companies they "own" because their mutual fund managers
> do it for them.
>
> If the administration wants to reinstate a healthy stock market,
> they need to place restrictions on the governance of publicly traded
> companies to prevent management's abuse of their shareholders. The
> SEC, or perhaps the retirement oversight agencies, have this duty
> because much of the public have no option but to put their retirement
> savings in publicly traded stocks via their 401K's, and most don't
> even know what stocks they indirectly own, so they are being unwittingly
> fleeced. Companies that don't like such restrictions should either
> go private, or, at least, should be banned from ownership by "Joe
> the plumber's" 401K, and only be traded by individual investors who
> actually get to vote on corporate governance.

Cisco: Compelling at These Levels

Have you looked at Cisco's balance sheet? Before you do, take a guess at how much the company has accumulated in profits over the past 15 years - in $ billions.

Who's Sharing Cisco's Cash?

[Please pardon me if this message is posted more than once. I tried twice as a non-registered user, but nothing happened. I emailed the website, but no response. I then registered, logged-in and will now make another attempt at this. Again, forgive me if multiple posts appear.]


Since 1995, Cisco spent approximately $45 billion buying back 2.2 billion shares. Employees paid $15 billion to exercise 2.2 billion options. Despite all the cash spent on buybacks, the share count remained essentially the same. The net $30 billion the company spent on buying back stock is in reality compensation paid in a roundabout way; not that the accounting rules would reveal such a scandalous fact.

The "F" in FASB stands for fraud. FASB rules help deceive investors and give management the right to boast that they are "returning cash to shareholders." The only shareholders getting the cash are the employees. Cisco supports the stock price when employees flood the market with option exercises.

Here's the deal breaker: there are 1.2 billion options awaiting exercise, a dilution of 22% looms. Cisco will report "record" earnings, but it will use those "earnings" to buy back stock and mop up dilution.

There is one heartening fact amidst the gloom. Balance sheets don't lie. Stock buybacks are appropriations of profit. Cash spent on buybacks is classified as Treasury Stock and netted off against Retained Earnings. There has been no growth in Retained Earnings the past twelve years. In fact, in 2006 the balance sheet reported an "Accumulated Deficit" of $600 million. Today, "Retained Earnings" comprises only $0.04 of Cisco's approximately $4 book value per share.

In cash flow terms, the company generates more cash selling stock to employees at a deep discount than it does selling equipment to customers. Growth in Paid-In Capital exceeds top line growth. Let me remind you, last year after Barron’s touted the stock and Cisco reciprocated (awful thought) with double spread color advertisements, the company’s market capitalization surged to $200 billion. Executives quickly cashed out over a hundred million dollars worth of options.

I'm not short the stock. That way I can post this message without fear of the SEC terrorizing me. Cisco can publicly state that they are "returning cash to shareholders," which is a bold face lie, and regulators turn a blind eye. Post something on a message board that might cause you to gain on the short side and you risk arrest.

Just to protect myself further, all amounts above are approximations - do your own math. In principle, regardless of the numbers, the truth remains, Cisco is a company operated for the benefit of executives and employees. Shareholders don't have a prayer to ever make dime, other than to play the short-term volatility.

Albert Meyer (no pseudonyms for me)