Cisco’s (CSCO) outstanding shares are currently at 4.23 billion, down from 7.04 billion at the end of September. In 2021, Cisco plans to return at least 50% of its free cash flow back to shareholders in the form of $6 billion in dividends and $6 billion to $10 billion in stock buybacks.
The company has $10 billion remaining on its authorized buybacks, while another $6 billion is spent on research and development. However, Cisco’s revenue growth is anemic, so one has to wonder about the value of this spend.
Dan Weiskopf is co-portfolio manager of the Amplify Transformational Data Sharing ETF and member of the Investment Committee at Toroso Investments, an exchange-traded fund asset manager with AUM of $5.4 billion as of Dec. 31, 2020.
As a leading company in the networking space, Cisco’s management needs to take risks and demonstrate it is prepared to embrace disruption. Its $30 billion in cash could be used to reduce the share count further and increase the per share free cash flow and earnings per share.
But after reducing the share count by about 3 billion shares since 2000, we can say that this use of capital does not solve the core problem. Cisco’s roots go back to the internet-of-things and its early success came from being at the core of connecting the globe through the internet. As the value of bitcoin reflects trends in blockchain, this should be at the core of Cisco’s future and should be at the core of the company’s ecosystem today.
Lead with technology
Technologists or futurists want to work where new, exciting things are invented. Let’s face it: high IQ minds enjoy the challenge of learning from each other. Cisco used to be a company that took risks and thrived on pushing the envelope on what could be done.
Cisco’s venture capital portfolio reflected this concept and at times represented $13 billion on its balance sheet. It was also a constant source of innovation and inspiration. Remember the $3.2 billion WebEx deal that was going to connect all people virtually? Oops: That became Zoom, which is worth $126 billion today.
Cisco used to be a company that took risks and thrived on pushing the envelope on what could be done.
Holding bitcoin for employees can be also about messaging. Look at what Michael Saylor has done with MicroStrategy. Bitcoin ownership by the company is run separately from software solutions and therefore it is about capital appreciation, diversification and, yes, inspiration. Remember: MicroStrategy’s mission is to make “every enterprise a more intelligent enterprise.”
Keeping the two separate as businesses means both corporate assets stand on their own merit. But they can still find synergies independently in the blockchain ecosystem.
Customers care
Customers in the emerging markets and Asia use bitcoin as a means to transact. We do not expect large U.S. companies to pay Cisco in bitcoin, but offering the option of doing so demonstrates Cisco is not limited by U.S. standards and embraces the change that is ubiquitous in the emerging markets and Asia. Companies abroad are looking for brands like Cisco and IBM to show leadership. Payment in bitcoin could even be accretive to the bottom line.
Cisco would not necessarily have to hold the bitcoin beyond a certain portfolio value. When payments are made, it could sell it and book a gain or a loss similar to currencies. Note that the futures markets are arguably developing into a deep enough market that hedging is possible in the case of such transactions. Cisco could limit bitcoin payments to between $50 to $100 million initially and easily accomplish hedging, especially given Cisco’s gross margins.
Technology investors look for growth
Most investors in technology companies want risk and growth. They don’t want technology firms run by management teams who think of themselves as running banks or dividend growth stories. This is why Cisco did not pay a dividend at all for years.
Today, the stability of the dividend is clear and comforting for a certain type of investor, but to say the best use of capital is a continuation of the buyback while growth is not evident sends a message of defensiveness rather than confidence in the future.
A new, invigorated Cisco would excite and earn the confidence of investors willing to pay more in the form of a higher multiple. In 2012, Cisco’s free cash flow multiple was at its cheapest point at about 4.8x and today it is north of 11.5x. I understand that reducing the share count to increase the amount of the ownership of a company by its shareholders is tax efficient, but how does this help the company grow, innovate and lead in its industry?
Acquisitions better than BTC
Are there other companies for Cisco to buy in different verticals that make more sense than bitcoin? Maybe! Of course, that would require the company to take integration risk and shake things up. Should such an acquisition be aligned with the blockchain? Yes! We all agree blockchain will be a growth engine for technology. If that is true – and a blockchain acquisition makes sense – what should the follow-on value of bitcoin or even ethereum be as a result? However, why is an investment in bitcoin considered to be a diversifier rather than an investment in Cisco stock by the company? Isn’t diversification designed to lower risk?
I was a shareholder when Roger Biscay, Cisco’s current corporate treasurer and head of Global Corporate Security, joined the company in 1999. I know the pain of poor risk controls. At the time, Barron’s predicted Cisco was going to be the first company to reach a trillion-dollar market value. Clearly, it failed in this ambition so a change is necessary.
To say that the best use of capital is a continuation of the buyback, while growth is not evident, sends a message of defensiveness.
I do know that Scott Herren, the CFO, only joined the firm in December and CEO Chuck Robbins took over in 2017. My point is that something needs to change. The plan to buy back the company stock over the coming 10 years is not a strategy that enhances shareholder value any more than a plan to shrink and not innovate.
If Cisco continues to spend $6 billion in R&D, $6 billion in dividends and $6 billion in buybacks, it could still buy $2 billion to $4 billion in bitcoin. To spend $10 billion on buybacks only follows the path of reducing the share count for the benefit of value investors, who are a narrow section of the buyers in the stock market. Respectfully, I think value investing makes sense.
However, it must be followed by innovation to be really successful. A value investment that grows to become a growth investment is a recipe for a doubling in price. After spending hundreds of billions of shareholder money shrinking the float by three billion shares, management does not seem to be preparing the company for the future and is failing to take proper risk.
