Cisco Systems has announced a stock buy back of $10 billion. The company believes that its shares are undervalued in the market. By means of this move. The Truth About Cisco's Buybacks - Cisco Systems, Inc. I am a huge proponent of a well- executed buyback program, as it can return enormous value to shareholders. For an example of one that has been done very well, Coca- Cola (NYSE: KO) is a shining illustration for all to mimic. In this article, we'll take a look at Cisco's buyback history from the past ten years, and while not as outstanding as Coke's, I don't think Cisco gets enough credit for retiring as many shares as it does. In short, I want to set the record straight on Cisco's buyback activity. While buybacks are controversial to some investors, who would rather see investment in the business, an acquisition or a cash dividend, I think buybacks add value over the long term for shareholders. A dividend is nice, but it is a one- time payment and then must be made again and again. A share repurchase, however, accrues benefits forever to shareholders. If a share is repurchased and retired, EPS is higher forever on the remainder of outstanding shares. In addition, if a dividend is paid on shares, the money allocated for dividends each year goes further on each remaining share. Thus, buybacks are a worthy allocation of excess capital from a business, as long as prices paid aren't too high. In the Coke example, management has proven adept at timing its share repurchases to maximize the value accrued from them, and while Cisco can't make the same claim, it has executed a reasonably successful share repurchase program. Click to enlarge. Source: YCharts. This chart shows Cisco's outstanding share count from the past ten years. As you can see, Cisco started with about 6. While that is certainly not on the same scale as the Coke buyback, it is more effective than many investors think Cisco has been with its share repurchases. Cisco is famous for issuing enormous amounts of stock and options to its employees, diluting shareholders in the process. However, I'm fine with that as long as the shares are mopped up with buyback activity and then some, as we see above. I don't like getting diluted by employees anymore than anyone else, but it is going to happen anyway; at least Cisco is spending its excess capital on repurchasing more than it issues. In just the past ten years, Cisco has managed to retire something like 1. That is an astounding amount of retired shares, and if you don't believe in the power of buybacks, consider this data. Cisco made $9. 9. EPS. Had Cisco not retired a single share during the last ten years, that EPS number, on the same amount of earnings, would only be $1. If we assume Cisco would have the same earnings multiple as it does now, a 1. PE, Cisco shares would only be trading in the $1. Cisco Jumps on Anticipated Stock Buybacks, Facebook Climbs on Overseas Ad Growth: Tech Winners & Losers Cisco System jumped after announcing its pending bond sale, a.You can see easily how the buyback activity is helping shareholders even today. Shares that were retired ten years ago are still accruing benefits to Cisco shareholders and will continue to do so forever in the form of higher EPS, all else equal. Cisco has some faults, like any other company, and one that shareholders have been pretty vocal about is its profligate issuance of options and stock to its employees. This activity dilutes existing shareholders, and while I don't like it either, it's a fact of life owning Cisco shares. However, I think the company has done a much better job of retiring shares than it is given credit for, and the data above shows why I feel this way. The bottom line is that Cisco is more shareholder- friendly than many think, and management does have shareholders in mind. Disclosure: I am long CSCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Driven by low interest rates and an economy rife with uncertaint.. Driven by low interest rates and an economy rife with uncertainty, Corporate America is awash with cash. Rather than spend that money on internal investments that might not pan out, companies have instead decided to return that money to shareholders by buying their own stock. The debate over whether it’s better for firms to send money to shareholders in the form of buybacks or in the form of dividends has gone on for decades. But we can all agree that companies ramping up their share repurchasing has buoyed stock prices. This chart from Bianco Research shows how buybacks have soared since the end of the recession and are now close to all- time highs:
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