Opinion

The Great Debate

It’s time for Cisco to cough up shareholder cash

By Ralph Nader
January 30, 2012

What is it that Cisco CEO John Chambers and his executive corps don’t get about their patient, loyal shareholders? It is called an appreciation of shareholder value.

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

Comments
9 comments so far | RSS Comments RSS

Ralph Nader needs to take a deep breath and look at the wider effects of his harassing Cisco about shareholder value and cost-cutting. One of the outcomes of his harangues was not only the re-focusing of Cisco (which was necessary) but of a large layoff because Cisco’s profits-per-employee figure was lower that other “comparable” companies and, so, shareholders were not receiving full value. Looking at the larger picture, if those employees were still at the company, they would be earning salary, putting money back into the economy, and fueling the use of networks and the need for networking equipment. Wouldn’t suffering slightly lower profits be a reasonable sacrifice for long-term product-need and stability? Ralph Nader seems to have turned into a misguided demagogue who is trying to curry favor among investors at the expense of the employees who contribute to a company’s success.

Posted by ScottRH | Report as abusive
 

Great job bringing this to light Mr. Nader!!!

Posted by LenicGB | Report as abusive
 

Ralph, 18,000 Cisco shares? Things are looking up since the Corvair days, eh? You go, dude.

A couple things. First, if Paul runs as an independent, can you do the same? We’d like the two centrist losers to have an even match, you know? You stuck it to Gore after that nutso Perot stuck it to Bush and we ended up with 16 years of bad presidents after each of those. A little patriotism, eh? Nowhere else in the world would have welcomed you like the USA. Time to give back. Sell a few Cisco shares and you can self-fund.

Enough politics.

That other nut, Jobs, on whose NeXT board that nut Perot was when he made his ’92 run, just before he said “oh wow, oh wow, oh wow,” promised to spend all of Apple’s $40 billion to kill Google because they did something or other bad to him. We don’t recall all the details, but that was the gist of it. If you own any Apple, could you maybe call the Reuters guys and tell them you want to do a Part II on this issue on Apple? Our hunch is their shareholders would vote for you. Their 40,000 American employees will too. Shame the other million live in China.

We’ll trash Cisco for you soon, in any event. Always happy to hear about the unpatriotic.

Posted by WeWereWallSt | Report as abusive
 

I have watched Cisco for years. I have never bought and I never will. Frankly, they don’t care for stockholders and it shows. There are plenty of other companies to invest in that like their stockholders. Just sell.

Posted by epeon | Report as abusive
 

So Nader thinks that he can raise his head to appeal for higher dividend payments in the the hopes that no one will remember his phoney third party Presidential run that was really intended to protect his stock investments. The comment that “Ralph Nader seems to have turned into a misguided demagogue” is several years too late. That’s what he’s always been and even his early, legitimate contributions to consumer protections cannot provide cover for his hypocritical self interests. Go away Ralph. You are a joke and no one takes you seriously.

Posted by Greenspan2 | Report as abusive
 

Nader has always had a knack for walking into a party and dumping a big one in the punch bowl. Thinking he’s making an important point, he just ends up damaging things. GM’s Corvair was not dangerous, but Ralph’s obsession with its peculiar rear suspension killed a small, innovative car with a future and helped ensure that Detroit would only build archaic dinosaurs. Yes, that’s the effect Nader had on the American car industry. And then we all know how he got W. Bush elected in 2000… Now he’s doing his best to put dents in one of the most solid tech companies in the country, just so he can fight his crazy windmills. I’m sorry, but this is throwing the baby out with the bath water, again.

Posted by mrearlyadopter | Report as abusive
 

Who could go wrong investing in Cisco. You have John Chambers running the show and Ralph Nader picking up the pieces that impede Cisco’s return to the glory days. I can’t for the life of me see what Cisco has to lose in offering a larger piece of the pie to shareholders. As the baby-boomer generation retires, this largest sector of the population might invest more of its money with Cisco if it knew they could get 3 to 5% return on their investment.

Posted by Ballantine | Report as abusive
 

I was a “Nader’s Raider” back in my prime years! He sure did great works in getting rid of the most dangerous car in the world – the Corvair! It is not such a bad idea to have him criticizing Cisco’s reluctance to offer a dividend increase. They only offer 8-cents per share and this is not right in the face of the compelling case Mr. Nader presents. Yes, if Cisco and Chambers do expect us shareholders to be loyal, they must strive to make our investments attractive to us. I think Chambers hanging onto buybacks as the way to increase shareholder value doesn’t hold water and so will soon cause investors to sell off. This is hardly the position Cisco needs to be in. They are right now in a position of getting their operations refocused into profitable business enterprises, and to have plenty of investors to do so must necessitate their providing substantial dividends to keep their shareholders happy. I think to have someone with the knowledge, concern and experience of a businessman, entrepreneur and former political candidate express his concerns accordingly should influence both Cisco as well as investors to be more favorably inclined to offer greater dividends. Indeed, Mr. Chambers ought to re-think his current assessment of shareholder’s enthusiasm by putting some cash on the table for our continuing support as well as increasing Cisco’s market share in the IT communications equipment industry.

Posted by Ballantine | Report as abusive
 

I have owned Cisco for years. It is the best company in the world. I recommend buy up all of the shares you can at these bargain prices. Cisco is in the heart of the computer technology business especially with UCS. It will only continue to grow and prosper. Nader must see this and is bewildered that Mr. Chambers and company are not feeling that loyal shareholders like himself (15,000 shares) are entitled to a sizable dividend increase commensurate with the company’s vast free cash flow and improved business conditions. If Ralph Nader is making such recommendations, Cisco ought to capitalize on accepting his very prestigious opinion. In recent months and years, Cisco has been the victim of a lot of negative publicity from Wall Street analysts; it’s now time for them to rise to the occasion – a boost in the dividend would most certainly result in an enhanced business climate and do much to keep Cisco at the forefront of the networking industry.

Posted by Ballantine | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
  •