Cisco stock repurchases ... what's the point?

The purpose of stock repurchases is to increase shareholder wealth, or so says Cisco's management as it dedicates billions to buying back its own stock. So I'm surprised to see that Cisco's stock market value last Friday was only $88 billion (CSCO). Just a mere $3.2 billion more than the total of Cisco's cash of $29.5 billion and common stock repurchases of $55.3 billion. Which leads me to ask, what's the point of Cisco's stock repurchases if it's not increasing shareholder wealth? So far in 2009 Cisco has spent $1.6 billion* on stock repurchases, and in total $55.3 billion since Cisco's board of directors first authorized stock repurchases in Sep. 2001 (page 22).

Year Dollar Amounts of Cisco Common Stock Repurchases by Fiscal Year
2009 $   1.6 billion*
2008 $ 10.4 billion
2007 $   7.8 billion
2006 $   8.3 billion
2005 $ 10.2 billion
2004 $   9.1 billion
2003 $   6.0 billion
2002 $   1.9 billion

Total $ 55.3 billion
Source: U.S. Securities and Exchange Commission *Includes stock repurchases that were pending settlement as of January 24, 2009 (page 24). In a Nov. 2006 announcement that Cisco's board of directors had authorized yet another repurchase of Cisco stock, Cisco CFO Dennis Powell (since retired) stated: "We continue to believe in our repurchase program as a way to optimize the value to our shareholders. "Today, our share repurchase program allows us to return cash to our shareholders, while at the same time provides the flexibility to aggressively invest in the business for additional growth and differentiation, which we believe is good for both our customers and our shareholders." On the same day as Powell's statement above, Seeking Alpha stock market commentator Eddy Elfenbein wrote: "Seriously, it's time we had an intervention for Cisco (CSCO). This company needs to STOP buying back its stock. It's getting out of control. They just announced another $7 billion buyback. For the love of god, someone make them stop. "This company is sitting on a mountain of cash (nearly $20 billion) and it's getting thrown away. What's wrong with a nice little dividend? Too much cash is not a good thing for a company. This is what I like to call the Bladder Theory of Corporate Finance. Cisco has wasted billions of dollars on buying back a stock that has gone nowhere." Yours truly does not know the motivation for the stock buyback -- at the time of Cisco's first authorized buybacks, large institutional investors were reportedly pressuring management of underperforming stocks to undertake a buy back. But two comments to Elfenbein's 2006 article caught my attention ...
Comment 1 "Buybacks are tax-advantaged dividends. Your complaint, to my mind, would better be directed at Cisco's dilutive compensation practices."
and the second comment:
Comment 2 "Dilutive compensation practices equals buy backs in this case (and a great many others). First management hands themselves a ton of stock, then they have the company buy it back (indirectly) from themselves. Any time you see stock options plus buybacks, you're looking at a net transfer of cash from your pocket into theirs."
Dilutive compensation practices may explain the Cisco options overhang discussed by Motley Fool. Without its stock repurchases, Cisco would have $84.8 billion of cash available for acquisitions today, almost equal to its current stock market value. My point is that Cisco would be in the position today to purchase another company similar in quality to "Cisco," if it had not repurchased its own stock. If Cisco stockholders want cash for their stock, all they have to do is sell it on the open market, why does Cisco have to buy it? According to Wikipedia:
"There has been a meteoric rise in the use of share repurchases in the U.S. in the past twenty years, from $5b in 1980 to $349b in 2005."
And of course we are left with today's financial crisis, as the late Marvin Gaye was so famous for singing: What's Going On? Related stories:

Is Cisco short of cash in the U.S.? How well is Cisco management running the business?


What's your take on Cisco's stock repurchases? BradReese.Com Cisco Refurbished Contact: Brad Reese Twitter: http://twitter.com/BradReese Call Toll Free 866-864-0506 or International 850-364-4115

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