Can Cisco Systems, Inc. Maintain These Massive Stock Buybacks?

Cisco's stock buybacks have been increasing in size and may be at a point where they can't continue. We look at the numbers behind the buyback and walk away concerned.

Feb 25, 2014 at 9:30PM

Cisco (NASDAQ:CSCO) is regularly accused of managing earnings per share through share buybacks, but should this keep investors from buying shares? When the demand doesn't hold up, the stock price has been supported by a rich dividend (for a tech company) and massive share buybacks. But can the buybacks grow too large for this to continue?

Cisco recently reported a very poor quarter where six of its eight product segments saw declines from the prior year.

 Q1'14Q2'14Seq Growth
Switching  $3,754  $3,271 -13%
NGN Routing  2,043 1,741 -15%
Service Provider Video 987 957 -3%
Collaboration 1,027 881 -14%
Data Center 601 605 1%
Wireless 540 511 -5%
Security 365 393 8%
Other  80 64 -20%

Source: Cisco quarterly earnings spreadsheets and author's calculations. Figures in Billions

Negative revenue growth? The stock must have taken a bath. Think again. Despite that glaring problem, shares only traded off by 3%. Compare that with another hardware company: Rackspace (NYSE:RAX).  When Rackspace reported slowing revenue growth, not even declines, the shares lost 19% of their market value in one day. In Rackspace's case though, the Street is modeling for $0.63 per share in earnings in 2014, and shares were trading at a nosebleed 68 times earnings before the release. Rackspace also doesn't have a dividend to attract income investors.  

Cisco's steady stream of earnings produced a low price/earnings multiple of 11.5 and a dividend that is now paying 3.5% in the coming year. In difficult quarters, Cisco has been known to buy back enough shares to keep the earnings multiple low while paying a good dividend.  However, this may not be sustainable. A close look at the numbers shows that Cisco is dramatically increasing the amount of capital it uses each quarter to buy back shares and may be reaching a crisis point. Each of the tables that follows is based on the company's quarterly filings or press releases.

In just the last 4 quarters, Cisco has increased the amount of capital it used for share repurchases by 370%.

$of Shares Repurchased 0.85 1.17 1.99 4.02
$of Dividends Paid 0.91 0.92 0.91 0.90
Total Capital Used 1.76 2.08 2.90 4.92

Source: Cisco quarterly press releases and author's calculations.

Now the company is buying back almost 5 times the number of shares it did just 4 quarters ago. The share buyback in the most recent quarter accounted for 3.4% of the total shares outstanding!

Avg Price ($) 20.85 24.80 23.65 21.73
Shares bought back (millions) 41 47 84 185
Capital expended ($, billions) 0.85 1.17 1.99 4.02
Ending Sharecount (billions) 5.4 5.4 5.4 5.3
% Shares bought back 0.8% 0.9% 1.5% 3.4%

Source: Cisco quarterly press releases and authors calculations.

You may be thinking that Cisco must be getting a lot of bang for these bucks to justify such a large dollar volume of purchases. Unfortunately, that doesn't seem to be the case because the company is issuing shares as fast as it is buying them back. Over the four quarter period, outstanding shares did decline by 60 million shares but the company bought back 357 million shares.

(in dollars)Q3'13Q4'13Q1'14Q2'14
EPS Purchased 0.004 0.004 0.008 0.016
Non Buyback EPS 0.503 0.519 0.520 0.457
EPS Reported 0.506 0.524 0.528 0.473
Consensus 0.490 0.510 0.510 0.460

Source: Cisco quarterly press releases and authors calculations.

So how would EPS look compared to consensus if we back out these buybacks? Not too bad until this quarter. This is the first quarter where earnings would have needed to be rounded up just to meet consensus, but in 3 of the last 4 quarters EPS would have appeared at least a penny lighter without the buybacks.

Net Income (Non-GAAP) 2.728 2.847 2.867 2.521
Capital for Div & Buyback 2 2 3 5
Dist % of Net Income 65% 73% 101% 195%

Source: Cisco quarterly press releases and authors calculations. Figures in Billions

The concern is what happens now. The capital used for dividends and buybacks has been increasing dramatically and in the January quarter, accounted for nearly 2 times net income. This isn't sustainable especially when revenues are continuing to decline. Cisco has already ratcheted back revenue expectations to a decline of 6% to 8% for the coming quarter so how will it meet earnings estimates going forward? If there is less revenue, there will also be lower margins and less capital to buy back stock.

Cisco has one of the best management teams in the business but these trends are very concerning. It seems like structural changes are going to be necessary because this level of buybacks cannot continue. 

More compelling ideas from The Motley Fool
Let's face it, every investor wants to get in on revolutionary ideas before they hit it big. Like buying PC-maker Dell in the late 1980's, before the consumer computing boom. Or purchasing stock in e-commerce pioneer in late 1990's, when they were nothing more than an upstart online bookstore. The problem is, most investors don't understand the key to investing in hyper-growth markets. The real trick is to find a small-cap "pure-play", and then watch as it grows in EXPLOSIVE lock-step with it's industry. Our expert team of equity analysts has identified 1 stock that's poised to produce rocket-ship returns with the next $14.4 TRILLION industry. Click here to get the full story in this eye-opening report.

David Eller has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Rackspace Hosting. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers