Say Hello to Cisco's Newborn

Cisco Systems (Nasdaq: CSCO  ) has been promising a dividend for some time, and recent financing moves pointed to an imminent announcement. Well, it's here: Cisco's first-ever cash dividend will be born as a $0.06 payout, and it's tagged as a quarterly dividend. Cigars for everyone!

Assuming that the $0.06 payout per share stays stable over the first year, we're looking at a dividend yield of about 1.4% at today's share price. With about 5.5 billion shares outstanding, this amounts to an annual cost of about $1.3 billion or just under 15% of Cisco's free cash flow in 2010.

Considering that the company already spent some $9 billion over the last 12 months to buy back its own shares, Cisco seems quite committed to returning value to shareholders. And before you start complaining about the company's stock-based compensation programs eviscerating the value of those buybacks, you should also know that Cisco issued $3 billion in new shares over the same period. Most of the buybacks really do achieve something more than just staying afloat.

Translate that $6 billion net buyback activity into straight dividends and you'd get something like a $1.09 annual payout per share or a 6% yield. That's quite comparable to established dividend kings such as AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) , both of whom hover around the 6% yield mark without any buybacks to speak of.

Don't expect Cisco to do that reshuffling anytime soon, though -- and maybe never. Fellow techies Intel (Nasdaq: INTC  ) and Microsoft (Nasdaq: MSFT  ) are both following a very similar model to what Cisco has in place now, especially Microsoft, which over the past 12 months spent $13 billion on annual net buybacks but only $4.8 billion on dividends.

So Cisco joins the ranks of grown-up tech titans and starts out with an already-popular financial model. The yield isn't big enough to make Cisco an income-generating powerhouse today, though that might change with steady raises over the years, or a few more sharp blows to the underlying stock price.

Cisco would have by far the thinnest payout on our Income Investor scorecard, but the path to a thousand payouts begins with a single penny, and Cisco has started its journey.

Interested in more information about Cisco? Add the stock to your watchlist.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Intel and Microsoft are Motley Fool Inside Value selections. The Fool has created a bull call spread position on Cisco Systems. The Fool owns shares of and has bought calls on Intel. Motley Fool Options has recommended a diagonal call position on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Microsoft. Motley Fool Alpha owns shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (5)

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  • Report this Comment On March 18, 2011, at 9:44 PM, jimmy4040 wrote:

    "And before you start complaining about the company's stock-based compensation programs eviscerating the value of those buybacks, you should also know that Cisco issued $3 billion in new shares over the same period"

    There's no need to complain about it when you can profit from it. You buy it between 15-18, and you sell between 23-26. It's a can't miss, because you know the stock options will never allow it to rise above that except on very rare occasions.

    "especially Microsoft, which over the past 12 months spent $13 billion on annual net buybacks but only $4.8 billion on dividends"

    The only problem with that is the stock LOST almost $5 a share over the same period or approximately $42 billion in market cap. Puts things in a WHOLE new perspective doesn't it?

  • Report this Comment On March 19, 2011, at 3:22 AM, wmtworker wrote:

    JIm Cramer says that cisco is dead money right now.He seems to me to be a much more short time trader than the motley fool.

    I try to learn from both points of view,

    Any comments would be apreciated.

  • Report this Comment On March 19, 2011, at 6:45 AM, pryan37bb wrote:

    Enebrial, I see him as more of a quasi-long sorta guy. The way I heard him say, there are much better names in tech in terms of valuations, like MSFT and INTC, and he's sort of once bitten twice shy after Cisco plummeted, but I don't know if he thinks the growth profile has changed as some people worry.

  • Report this Comment On March 19, 2011, at 8:33 AM, evanlier wrote:

    CISCO’s stakeholders should know what they want. Shareholder value comes in two ways: either dividend or capital gain (and ideally a positive combination between both).

    Long term investors are more looking at share value (apart from daily traders who look for momentum), as dividends are logically limited to a meager 1 or 2% return. Dividends are also irrelevant in terms of share value, being the result of strategic and long term management decisions. Therefore, it is vital to understand how CSCO’s management is going to invest their incredible cash reserves, more than which part will be devoted to dividend.

    By the way, in terms of future free cash flow, CSCO is now worth $ 21 per share and, yes, quite a drop from the $23 per share it was known to be worth before its last Q results.

    Nothing to do with share price yet or daily stock price fluctuations, but somewhere it should get close.

    Ed Van Lier

  • Report this Comment On March 19, 2011, at 12:43 PM, evanlier wrote:

    CISCO’s stakeholders should know what they want. Shareholder value comes in two ways: either dividend or capital gain (and ideally a positive combination between both).

    Long term investors are more looking at share value (apart from daily traders who look for momentum), as dividends are logically limited to a meager 1 or 2% return. Dividends are also irrelevant in terms of share value, being the result of strategic and long term management decisions. Therefore, it is vital to understand how CSCO’s management is going to invest their incredible cash reserves, more than which part will be devoted to dividend (or share buy back if there is idle cash).

    By the way, in terms of future free cash flow, with today's known basic assumptions,CSCO is now worth $ 21 per share, quite a drop from the $23 per share it was known to be worth before its last Q results.

    Nothing to do with stock price but sooner or later share value and stock price should get close.

    Ed Van Lier

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