It’s time for Cisco to cough up shareholder cash
As the owner of 18,000 Cisco shares, I’ve recently taken a closer, vested interest in the company’s remarkable lack of understanding of what Cisco’s owner-investors want from their very well-paid management.
In 2000, Cisco shares reached a peak of about $82 a share. Since then it has been downhill for the share price, notwithstanding the company’s continued growth, diversification and profits. The very much larger Cisco is now selling for around $19 a share — with no intervening stock splits. The first paltry quarterly dividend of 6 cents a share just started in 2010.
The consistent upward trajectory of Cisco’s economic indicators has given loyal shareholders a sustained hope that has gone unrequited. In the past decade, thanks to Chambers’ penchant for stock buybacks, these have totaled $60 billion, leaving shareholders with nothing to show for them but a low and stagnant stock price. Still, Cisco presently has liquid assets of about $45 billion, growing at almost $3 billion a quarter.
In the past year, I and other shareholders have stepped up our demand for an increase in dividends to 50 cents a year plus a $1 special dividend. That is the least Cisco’s officers should do for their shareholders, many of whom trusted Cisco for over a decade and relied on management to reverse the tiny rate of return that they received for their loyalty. To no avail.
It is now clear from his latest quarterly announcements and September video briefing for investment firms that Chambers has declined to favor greater shareholder returns. At Cisco’s Dec. 7 annual meeting, he parried questions about dividends by noting that top management is always deliberating the best way to allocate company surplus among acquisitions, buybacks, dividends and accumulation. All in all, he has left the distinct impression with shareholders that he still views buybacks more favorably than dividends.
Most studies show that company buybacks have not increased shareholder value. However, they are used for executive stock options, acquisitions or massaging earnings-per-share numbers. Other data has convincingly shown over the last 40 years that dividend-paying stocks are better for shareholder appreciation than non-dividend-paying companies.
Chambers did leave open one window — that if Congress approves a tax holiday for another round of repatriation of accumulated profits held overseas (subject to a low tax rate of 5.25 percent), his board would vote an unspecified increase in Cisco’s dividends. So far, Congress and President Obama are resisting a furious corporate lobbying effort for this repatriation, because a similar one in 2004 did not result in companies honoring their intention of investing these earnings in job-producing enterprises.
Holding Cisco shareholders hostage both to an unlikely repatriation and a preference for more stock buybacks is infuriating already angry shareholders. One Indiana small businessman wrote to me, saying: “Over the past decade NO shareholder value has been created. Mr. Chambers has pocketed something close to $400 million for himself through salary and that scam of an options program that they give themselves.”
Another shareholder from North Carolina writes: “Management is hoarding cash. (I’m) afraid they will make another boneheaded acquisition, to the detriment of the company. (I) will happily support increase in dividend, special dividend, a change in management, or shake-up of the board. The company doesn’t seem to have a vision that works.”
One investor (owning 15,000 shares) sent me his email thread with Cisco from 2006. He told Cisco executives how disturbed he was that there were 4.8 million shares sold by insiders in the prior six months but only 5,000 purchased, reflecting what he said was a “pattern for years.”
Cisco’s response avoided his questions. He rejoined: “Shareholders invest in a company in order to receive income or growth. Cisco produces neither. The buybacks are not working.”
Many of the emails ended by asking what they could do, how they could get a voice as shareholders? How could I respond to these pleas when the corporate proxy system is so rigged that the owners of corporations are powerless, other than to sell their stock and leave entrenched management in place? One shareholder criticized the large institutional shareholders, naming Fidelity and Vanguard, as not being aggressive in directly pursuing greater shareholder value with management.
An additional incentive, given this serious recession, for large mutual and pension funds to elevate their dividend demands was expressed by an owner of 1,500 Cisco shares who said shareholders “would welcome the extra money. It would be immediately spent in a manner that would stimulate the economy here in the U.S.A.”
We know from inside sources that top Cisco executives are feeling some heat. They say they are debating with some intensity the allocation of liquid assets, and more dividends are in the debate mix. Moreover, they have forgone their 2011 year-end executive bonuses.
Publicly, however, their stance is unchanged. Increasing dividends does not appeal to them. Apart from more individual and institutional shareholders making their demands known more insistently, another proposal merits consideration. Cisco, as noted, has 5.5 billion shares outstanding. Were owners of just 10 million shares to contribute a penny a share, they could retain a full-time watchdog advocate for all Cisco investors to press the company bosses every workday to drop their indifference to what their owners truly want and deserve.
Such a penny-brigade initiative would provide an exemplary stimulus for low- or no-dividend-receiving shareholders of Apple, Intel, EMC, Microsoft, Google, Oracle and other cash-rich companies sitting on their owners’ legitimate desire to share in their company’s huge accumulated stash.
If the CEOs of these and other similarly situated companies need an additional reason for springing more megadollars to their owners, how about making a significant patriotic gesture to increase today’s lagging consumer demand in a troubled American economy?
PHOTO: John Chambers, chief executive of Cisco Systems, speaks during a news conference at at the 2010 International Consumer Electronics Show (CES) in Las Vegas, Nevada, January 6, 2010. REUTERS/Steve Marcus