Apple has What Large Groups of People Want, but Cisco has What They Need
On the subject of dividends, long-serving CEO John Chambers has flat out said that Cisco will pay dividends before he retires, with the caveat that stock buybacks and acquisitions are a better way to spend money for the next two to three years. 1
Regarding residual fear from the tech bubble and general post-financial crisis economic fears, there is the prospect that Cisco will eventually grow enough to overcome both. At present, doubts push the share price down. Take, for example, the market’s reaction to Chambers remarks during the 4th quarter earnings conference call last week. Chambers said:
In short, we see the same opportunities and challenges that you are reading about in regards to the market. Those challenges ranging from GDP growth and future GDP projections, continuing to slow in the U.S., job creation challenges and concerns coming out of Europe, just to mention a few.
We are seeing a large number of mixed signals in both the market and from our customer’s expectations, and we think the words unusual and uncertainty are an accurate description of what is occurring.
The Federal Reserve’s comments yesterday that the pace and output of the recovery had slowed in recent months and that the recovery is likely to be more modest in the near‑term than has been anticipated just a few months ago are comments that most of our large customers that I’ve talked with recently would agree with. Also, the same customers would agree, with few exceptions, that they still expect a very gradual return to more normal economic conditions. 2
Chambers’ words should not be a surprise to hear from any prudent businessperson today, but the market nevertheless took this passage as a warning about Cisco’s future demand,3 and perhaps as reflecting doubt about Cisco’s ability to meet its internal target of 12% to 17% year over year growth. 4 But there is an alternative explanation.
Chambers statement may have at least been in part a reference to other weaknesses, like the generally depressed price of equities, making acquisitions and buying back Cisco’s own stock attractive as opposed to warning of weakness in Cisco’s business. In other words, Chambers may have intended the remarks to tell the dividend hawks to hold their horses so that the company can generate even more long‑term value for shareholders while prices are still low.
The point here is that in Cisco’s case, recent economic weakness may generate more long-term value for shareholders. And given that the company posted an average yearly earnings per share gain of 27% over its 2002 through 2009 fiscal years, and still around 10% excluding massive gains in 2003 and 2004,5 management and Chambers’ credibility is high.
So if the company executes on its internal goals in confluence with beginning to pay dividends, it’s reasonable to think that this may overcome the psychological barriers that have been tethering the stock.6 To the disappointment of short-term investors, this process could take awhile to fully unfold. But it may be worth waiting for.
Disclosure: The author is long on Cisco (CSCO) as of the original publication date of this post. The author does not hold a securities position in Juniper Networks (JNPR) or Apple (AAPL). The information provided in this post does not constitute professional investment advice, and should only be used in consonance with all available information, including the opinion of a professional adviser, to make an investment decision.
- “Cisco CEO says will pay dividend before retiring,” Reuters, June 11, 2010, available at http://www.reuters.com/article/idUSN1111520120100611. CFO Frank Calderoni has echoed this message. “Cisco Sees Dividends in the Future,” The Street, May 15, 2010, available athttp://www.thestreet.com/story/10756221/1/cisco-sees-dividends-in-the-future.html. [↩]
- Cisco 4th Quarter 2010 Conference Call, August 11, 2010, available at http://seekingalpha.com/article/220121-cisco-systems-inc-f4q10-qtr-end-07-31-10-earnings-call-transcript. [↩]
- See “Cisco Sales, Outlook Weak,” August 13, 2010, Investors.com, available at http://www.investors.com/NewsAndAnalysis/Article/543701/201008131833/Cisco-Sales-Outlook-Weak.aspx. [↩]
- See page 2 of the 2010 Q4 Conference Call at http://seekingalpha.com/article/220121-cisco-systems-inc-f4q10-qtr-end-07-31-10-earnings-call-transcript?part=qanda. [↩]
- This uses Generally Accepted Accounting Principles (GAAP) figures of $1.05 (2009), $1.31 (2008), $1.17 (2007), $0.89 (2006), $0.87 (2005), $0.70 (2004), $0.50 (2003), $0.25 (2002 [↩]
- For a good quantitative projection of continued growth on Cisco’s stock price, see “Spotting A Bargain And Taking It With Cisco Systems,” Sherli Looi, Forbes, August 17, 2010, available at http://blogs.forbes.com/greatspeculations/2010/08/17/spotting-a-bargain-and-taking-it-with-cisco-systems/. [↩]
