Cisco announces $25bn share buyback

Cisco has become the first big tech company to pass the rewards of US tax reform directly to its investors, with the announcement of a $25bn stock buyback plan that contributed to a 6 per cent bounce in its share price late on Wednesday.

Cisco had $71bn of cash held offshore at the end of January, amounting to the third largest pile of unrepatriated foreign earnings of any US company, after Apple and Microsoft.

Wall Street has been expecting the tech companies to take advantage of tax reform, which liberated them to repatriate huge cash reserves held offshore without facing higher taxes, to reward shareholders. But other companies have so far been slow in announcing specific plans, despite a promise from Apple, holder of largest cash hoard, to reduce its net cash position to zero.

Cisco’s latest buyback plan increases the total amount of stock it is authorised to repurchase to $31bn and points to a substantial cut in its net cash position, though it did not rule out making big acquisitions in future.

The company has borrowings of $39bn, incurred in recent years as it has tapped the debt markets to maintain dividend payments, stock buybacks and acquisitions without needing to dip into its overseas reserves. Along with a one-off tax charge of some $11bn in the US due to a one-off tax on foreign earnings included in the recent legislation, that more than accounts for its total cash and investments, which stood at nearly $74bn at the end of January. 

Despite that, Chuck Robbins, chief executive, said that Cisco had kept the financial flexibility to mount a large acquisition if needed. “We have also kept plenty of powder dry,” he said.

If necessary, it would ramp up borrowing to do deals, he suggested. “I wouldn’t assume we’re going to move to a position of deleverage,” he said in an interview with the Financial Times. “What we have is a tremendous amount of flexibility.”

The buyback would take place over two years, and free cash flow generated by the company’s operations would allow Cisco to keep a cash cushion of $10bn-$12bn, said Kelly Kramer, chief financial officer. That is despite a 14 per cent increase in the company’s dividends announced on Wednesday, which will lift the annual dividend payment to about $6bn.

Meanwhile, Cisco predicted its revenues would grow 3-5 per cent in the current quarter, due to a strengthening global economy and an overhaul in many parts of its business.

“There’s a great deal of confidence on a global basis, probably a lot more than we have seen for a very long time,” Mr Robbins said, though he added that Cisco’s new products and services had also lifted demand.

For the latest quarter, to the end of January, Cisco recorded a $11.1bn accounting charge as a result of last year’s Tax Cuts and Jobs Act, echoing giant charges recorded by other tech companies that had not provided in their accounts against taxes that might fall due in the US on their foreign earnings.

Excluding the tax effects, Cisco reported pro-forma earnings of 63 cents a share, above the 59 cents Wall Street had been expecting. Revenue of $11.9bn, up 3 per cent from a year before, was also ahead of an expected $11.8bn.