Networking-equipment giant Cisco Systems (NASDAQ: CSCO) reported results this Wednesday, covering the first quarter of fiscal-year 2023. The company generated adjusted earnings of $0.86 per diluted share, surpassing Wall Street’s consensus earnings estimate of $0.84 per share.
Investors and analysts applauded Cisco’s strong results, and the stock price closed 5% higher on Thursday. However, I don’t see a ton of headlines mentioning one of Cisco’s most shareholder-friendly qualities: The company is shoveling billions of dollars straight into the pockets of shareholders. I’m particularly impressed by Cisco’s effective use of stock buybacks.
Cisco’s buybacks make a difference
Fun fact: If not for the anti-dilutive effects of the buyback program, Cisco would barely have satisfied the consensus-earnings target.
Cisco’s adjusted net income increased by 2% year over year, landing at $3.5 billion. At the same time, the stock-repurchasing program reduced the share count by 12 million stubs in the first quarter. The canceled stock adds up to 127 million shares on a trailing basis, which works out to a 3% reduction.
In a world where Cisco doesn’t worry about share-count reductions, this-quarter’s earnings would have landed at $0.84 per share, but only by the skin of its proverbial teeth. With three significant digits, you’d be looking at earnings of $0.856 per share, a rounding error away from missing the analyst target.
OK, that’s no surprise
The lower share count shouldn’t surprise anyone, especially since the bulk of this-year’s buybacks fell in the second quarter of 2022. That period was covered in last-February’s earnings update, giving everybody nine months to update their earnings estimates accordingly. The exercise above is just a bit of calculator-based entertainment, illustrating how generous Cisco’s buyback program really is.
Cisco has invested an average of $1.1 billion per quarter in stock buybacks over the last three years. Dividend payments averaged $1.6 billion per quarter over the same period. That adds up to $1.69 billion of cash per quarter, sent right back to shareholders in the form of buybacks and dividends. Free cash flows in this time span averaged $3.53 billion per quarter, so the shareholder-bound cash returns consumed 48% of Cisco’s average cash profits.
CSCO Stock Buybacks (Quarterly) data by YCharts.
Cisco loves to share its cash profits with you, the shareholder
This generous cash return is no accident. Cisco has a history of generating massive cash flow and sharing them freely with stock owners.
On the earnings call, Cisco CFO Scott Herren said that the dividend-payout and buyback activity were “in line with our long-term objective of returning a minimum of 50% of free cash flow annually to our shareholders.” That’s been an official Cisco policy since the fourth quarter of 2019, three years ago.
I love seeing this shareholder-friendly policy in a veritable cash machine such as Cisco Systems. Even in an off-year like 2022, the company amassed $12.8 billion of trailing free cash flows — and sent half of it right back to shareholders.
CSCO Free Cash Flow data by YCharts.
Today, Cisco’s stock comes with a shrinking share count and a beefy dividend yield of 3.3%. You should expect the dividend payments to continue rising modestly over the years, while buybacks are adjusted to meet that 50% cash-sharing ambition, year by year. These qualities make Cisco a great buy for income investors, who value a free-flowing stream of cash profits and a tight commitment to cash-based profit sharing.
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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
