By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
Recent debt issue by Cisco Systems, Inc. (NASDAQ:CSCO) reminds some of similar actions by cash-rich Apple Inc. (NASDAQ:AAPL) in 2013
Cisco borrows money
At the end of February 2014, Cisco Systems, Inc. (NASDAQ:CSCO) raised $8 billion of debt in a mix of floating and fixed rate securities. The company intends to use the proceeds from this offering for general corporate purposed, including repayment of $3.75 billion of debt that is maturing in 2014 and to return capital to shareholders through the repurchase of shares and payment of cash dividends.
Apple in disguise?
The new debt issue echoes the actions by Apple last year. In one of the largest corporate debt issues, Apple Inc. (NASDAQ:AAPL) sold $17 billion of debt in April 2013. Apple did this despite the huge cash holding. Cisco Systems, Inc. (NASDAQ:CSCO) is similar to Apple in this regard because as of the latest quarterly report it had $47 billion of cash and equivalents on its balance sheet. This amount equals to 41.7% of company’s market capitalization. Even after subtracting short and long-term debt outstanding, the net cash position represented 26.5% of Cisco’s market cap. Cisco Systems, Inc. (NASDAQ:CSCO) certainly follows Apple Inc. (NASDAQ:AAPL)’s path here, and despite the fact that it does not need cash urgently, decided to take advantage of the current state of the debt markets and its historically low interest rates.
Valuation review
[drizzle]As of March 4th, 2014 close, Cisco Systems, Inc. (NASDAQ:CSCO) had a market capitalization of $113 billion and an enterprise value of $83 billion. During the first six months of fiscal 2014 year, the company generated $23 bil in revenues, $4.1 bil in operating income, $5.5 bil in cash flow from operations and $4.95 bil in free cash flow. In terms of valuation, company is currently trading at an EV/EBITDA multiple of x7.8 (based on an annualized 6m 2014 financials), P/S ratio of x2.43, P/E multiple of x16.5, and has a free cash flow yield of about 9% percent.
During the first half of fiscal 2014, company spent $5.7 billion on share repurchases which equal to a buyback yield of about 5% (10% if annualized). In addition to share buyback Cisco pays regular dividends which currently provide an annual yield of 3.1%. Cisco shares underperformed the S&P 500 Index by a wide margin of 120% over last 5 years. It is possible that Cisco Systems, Inc. (NASDAQ:CSCO) might become a target for activist shareholders. Recent debt issue might indicate that company management is taking a more pro-active stance here. Attractive valuation, meaningful dividend yield and active buyback program warrant close monitoring of company by thoughtful investors.
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