We, Once Again, Get Results
Posted by Eddy Elfenbein on September 14th, 2010 at 4:46 pm

Crossing Wall Street
August 11, 2005

Will Cisco Pay a Dividend?
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.

Los Angeles Times
September 14, 2010

Cisco Systems says it will start paying cash dividends
Computer networking titan Cisco Systems said Tuesday it expects to start paying a dividend for the first time. Investors liked the sound of that: Cisco’s shares were up 45 cents, or 2.1%, to $21.71 at about 11:30 a.m. PDT.

OK, I was a wee bit early. What do I look like…Nostra-freakin-damus? Here’s what I had to say:

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 per 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 was 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.

The company currently has a cash war chest of $40 billion ($7.01 per share). Cisco said it’s looking to yield 1% to 2%. At the current price, that works out to a quarterly dividend of around five to ten cents per share.

Reader Feedback
Posted by Eddy Elfenbein on September 14th, 2010 at 4:29 pm

Here’s an email from a reader taking the pro-buyback side:

“Microsoft has spent over $78 billion on share buybacks and the stock has done nothing but go down.”
That seems pretty misleading.
That means that MSFT bought back around 3B shares since 2006 (assuming $26/share). They now have about 8.65B shares outstanding. So if they had not bought back any shares and they had paid the money out in dividends instead, their 2010 earnings per share would have been only $1.75, instead of $2.36. As an owner of MSFT, this makes a BIG difference to me. And don’t you think the stock would be a lot lower today if earnings were only $1.75 per share?
Of course it would have been nice to get the dividend, but I hold MSFT in a taxable account, with a marginal tax rate approaching 25% (state and federal). So from my perspective I’d rather have MSFT buy back stock than pay dividends even if the stock was 30% overvalued! (Ignoring capital gains taxes, which I can probably defer almost forever). And of course I don’t think it is 30% overvalued, because then I would sell it, wouldn’t I. If I want to get some cash out of MSFT, I can always sell some shares.
(P.S. – still love the blog, but I really don’t get your antipathy to buybacks.)

At Least Microsoft Thinks Microsoft is Cheap
Posted by Eddy Elfenbein on September 14th, 2010 at 10:23 am

There’s been heavy speculation that Microsoft (MSFT) is going to sell debt this year in order to buy back its stock and pay dividends. This would be a fascinating move and it shows just how unusual the current market is.
Whatever you think of Microsoft and its future, the company currently generates an astounding amount of cash. According to the latest statement, MSFT has a cash balance of over $36 billion which works out to $4.22 per share. Their long-term debt is roughly $6 billion. Shareholders, not surprisingly, want some of that loot.
The problem with Microsoft’s huge bank account is that it’s mostly held overseas. As a result, MSFT is going to try and raise as much money as possible without affecting its AAA rating. One source said they could probably take in $6 billion.
When debt is expensive and equity is cheap, the rational choice for companies is to do exactly what Microsoft is doing—issue debt to buy stock. I’d be very curious as to the interest rate MSFT would land.
The company currently pays a 13-cent quarterly dividend which comes out to an annual yield of 2.07%. The dividend, however, is fairly modest compared to Wall Street’s current earnings estimate of $2.36 per share.
In May 2009, MSFT went to the bond market and floated $2 billion at 2.95% for 5-year notes, $1 billion at 4.2% for 10-year notes and $750 million at 5.2% for 30-year bonds. I think they can easily get much lower than that today.
Microsoft is in the lucky position of having its debt rated AAA by Moody’s and S&P. That saves them a lot of money in borrowing costs. Last year, the software had an amazing $22 billion in free cash flow. About half of that came from the United States.
Of course, there’s the question of whether or not a company should be trying to make money by shifting pieces of paper around. As David Merkel says, “Why pay money for financial engineering? Better you should look for genuine organic growth.” He’s got a good point. When I invest in a company I want them to do what they do best. Let me worry about if their stock is a good buy or not.
Since FY 2006, Microsoft has spent over $78 billion on share buybacks and the stock has done nothing but go down. The company is currently in the middle of a $40 billion buyback program that runs through 2013.
The other option is for Microsoft to spend its cash on acquisitions. Still, we’re back to the company being a money manager more than a software firm. To quote Biggie Smalls, “Mo Money, Mo Problems.”

Poll Shows Investors Distrust
Posted by Eddy Elfenbein on September 14th, 2010 at 9:46 am

The latest poll run by CNBC and AP shows widespread investor distrust of the stock market. Here are some bullets:
61% said the market’s recent volatility has made them less confident about buying and selling individual stocks.
55% said the market is fair only to some investors.
More than 60% said they had paid attention to news reports about swings in the stock market.
Among those with assets of at least $250,000, more than half blamed computerized trading for the big swings, compared with about a third of those with a net worth of less than $50,000.
Nearly 90% of those with portfolios of less than $50,000 said the market is unfair to small investors.
More than 75% of investors worth at least $250,000 say the market is unfair to the little guy.
Just 8% expressed strong confidence in regulators. Half expressed little or no confidence, including 16% with no confidence at all.
Asked to rate six investment options as a way to build wealth, mutual funds were the favorite, with 62% calling them a good investment.
ETFs finished at the bottom, endorsed by just over a quarter of those polled. About half had no feelings either way about these funds.
Drawing the highest number of negative reviews were real estate and savings accounts. Both were considered bad investments by about 1 in 4 people.
About three quarters of those earning at least $100,000 annually rated mutual funds as good investments, compared with 58% of those making less than $50,000.
As for individual stocks, more than 60% of investors with assets of $250,000 or more favored them, compared with less than half of those worth under $50,000.
Sixty percent of those with investments worth less than $50,000 liked savings accounts, compared with 35% with assets of $250,000 and up.
Nearly 80% of those surveyed said the best way to make money in the stock market is to buy stocks and hold them for a long time before selling.

Morning News: September 14, 2010
Posted by Eddy Elfenbein on September 14th, 2010 at 9:12 am

Oracle to Acquire Major IT Services Firm, In Our Opinion
5 Little-Known Facts About Social Security
Why stocks are likely heading higher
Yen Rises to 15-Year High on Kan Hopes; Asian Stocks Fluctuate
Beware starting trade war, China economist tells U.S.
Bunds Extend Gain After ZEW Shows Investor Confidence Drop; Yield at 2.37%

Quick Notes
Posted by Eddy Elfenbein on September 13th, 2010 at 4:08 pm

Today was a big day for small-caps. While the S&P 500 (^SPX) was up by 1.11%, the S&P Small-Cap 600 (^SML) and Russell 2000 (^RUT) were up by 2.36% and 2.49% respectively.
Gold is up to $1,245.10. When it hits $1,250 that it means it’s an even $20,000 a pound.
Eighteen of the 20 stocks on the Buy List closed higher today. The Buy List was up 1.53% today and it’s up 2.35% for the year.
Today was the 82nd day in a row that the S&P 500 closed between 1020 and 1130, but we’re getting close to the upper bound. We’re just 0.53% from our highest close in 17 weeks.

The Fed’s Gold Stash
Posted by Eddy Elfenbein on September 13th, 2010 at 1:35 pm

Alea brings up a very good point. The Federal Reserve’s gold holdings are marked at a price of $42.22 an ounce by law. The current market price is about $1250 an ounce.
According to Alea, going to mark-to-market “would force the Federal Reserve to disgorge more than $300 billion in exceptional profits to the Treasury. Germany did it 13 years ago, no reason for the US not to follow.”

DuPont Hits new 52-Week High
Posted by Eddy Elfenbein on September 13th, 2010 at 12:51 pm

Just a quick note on DuPont (DD). Here’s another good example of a boring company that can be a great buy.

Back when the world blew up, the stock dropped as low as $16 a share. But let’s look at the recent earnings trend. Last quarter, DD beat Wall Street’s forecast by 24%. The quarter before that, they beat by 17%. Then by “just” 7%. But the two before that were earnings beats of 36% and 15%. That’s a great run.
When the last earnings report came out, DuPont raised their full-year guidance range from $2.50 to $2.70 per share to $2.90 to $3.05 per share. That’s a hefty increase.
In June, DuPont’s CFO spoke of the company’s bold goals:

Fanandakis reaffirmed the company’s commitment to deliver about 20 percent compound annual earnings growth for the 2009-2012 periods. By executing on priorities, DuPont expects to generate about 10 percent top-line compound annual growth for the 2009-2012 periods. As previously disclosed, the company also plans to capture $1 billion in fixed cost productivity and $1 billion in working capital productivity gains during the 2010-2012 timeframe.

AFLAC’s Strange Ride
Posted by Eddy Elfenbein on September 13th, 2010 at 10:48 am

This is shaping up to be a very good morning. All 20 Buy List stocks are up. AFLAC (AFL) has been as high as $52.35 which is the highest price in over four months.
By the way, let’s take a step back and laugh at Wall Street for a moment. AFLAC reported Q2 earnings-per-share of $1.35 on July 27. That was two cents better than expectations. In April, they said to expect Q2 to range between $1.33 and $1.38 per share. In other words, this last earnings report was hardly a major surprise.
Yet, how did AFLAC’s shares respond to the earnings report? They sold off! The stock closed at $50.41 on July 27. The next day, they dropped 2.3%. By late August, the stock was off by more than 12%. Then, suddenly, everything turned around. AFLAC not only gained back everything it lost but it’s actually higher than where it was before the earnings report. This makes no sense. There’s been no critical news between then and now. We’ve simply seen traders push a staid stock down and up by a few billion dollars for really no reason. Remember that next time you place a buy order.

Morning News: September 13, 2010
Posted by Eddy Elfenbein on September 13th, 2010 at 10:06 am

Why Some Gloomy Investors are Bullish on Stocks
Bank Stocks Climb as Basel Gives Firms Eight Years to Comply

At Goldman, Partners Are Made, and Unmade
Asian Shares Gain on Economic Optimism

Geithner Urges Action on Economy
Consumers Will Pay More for Goods They Can Touch
U.S. Debt Fund Shuns Dubai World Debt Deal
The Era of Expert Failure