What is it that Cisco Systems 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 (U.S.), 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.”
