Will Cisco Pay a Dividend?

It’s almost hard to believe now, but Cisco Systems used to be the glamour stock. I’m not exaggerating when I say that people loved Cisco. Not matter how awful their own lives were, they always had Cisco. Spouses could leave them, jobs could suck, but Cisco was dependable. It was the one thing that never let us down. It was the financial North Star. It did its job simply by being there.

At one time, Cisco beat Wall Street’s expectations for 43 straight quarters. It was Cal Ripken in corporate form. The stock went up and up and up. It was (sniff) such a beautiful thing.

But now…it’s all gone. Cisco is no longer a star. It’s a wash-upped has-been. It’s fat and bald. It’s some guy wearing gold chains and driving a ’78 TransAm. It calls itself Cisco. It has the same symbol as Cisco, but it’s just not the same. I’m not ashamed to say that I (almost) cried at their latest earnings report. Not only was it a lousy report, but it gave a pretty bleak picture of the future.

The company’s sales grew by just 11%. And its earnings-per-share went from 21 cents to 25 cents. I’m not sure which is worse, the 25 cents or that 25 cents was inline with expectations. The old Cisco would have laughed at 25 cents. It would have grabbed that quarter, bit it, and spit it back in Wall Street’s face, and then, maybe eaten a light bulb. That was my Cisco.

Do you remember back in December when the CFO said he expected 12%-15% sales growth through 2008? Well, you can forget about that. Now the company says that sales will grow by 10%-12% next year. I get the feeling that John Chambers said to the Street “You want a forecast. Fine! Here’s a rotten forecast. Are you happy now?”

Well, no. We’re not. I’m going to make a prediction. No, not like my other lousy predictions. This time, I’m nearly serious. I predict that Cisco will start paying a cash dividend. Really, it makes perfect sense. The company generates gobs of cash, but they waste it on buying their own stock (just like everyone else who buys Cisco’s stock).

There are two reasons why Cisco buys so much stock. They issue tons of stock, and they give out tons of options to their employees. They bought nearly $20 billion of stock in the last two years and the stock hasn’t done a thing. Forget fighting the market: Just give it to shareholders.

The market simply doesn’t trust Cisco to spend its own money wisely. Here’s a nice little factoid: If you adjust for stock-option expenses, Cisco’s 2004 earnings would have been 45 cents a share, not the 62 cents that the company reported. I think the rumor that Cisco was about to buy Nokia was started by the Street just to get Cisco thinking about how it invests its money. I knew there’s no way that Cisco would buy Nokia. Too much of their own cash flow is flowing down the drain. They don’t seem to realize that that’s not a good thing.

John Chambers & Co. must seem baffled by the market’s displeasure with Cisco. After all, the company has reported decent profit growth for the last two years, but the stock hasn’t done much of anything. Just pay a dividend, and the market will forgive you.

Posted by on August 11th, 2005 at 6:56 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.