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Technology Stocks : Cisco Systems, Inc. (CSCO)
CSCO 79.27-1.2%Dec 11 3:59 PM EST
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To: RetiredNow who wrote (63026)2/8/2003 1:59:47 PM
From: Stock Farmer  Read Replies (1) of 77400
 
Mind, you slipped a decimal point.

And missed another point altogether. Go back and work it out. Shareholders have claim to:

Year 1:
Assets net of liabilities:            $1000
Add Income:                           $  10
Proceeds from stock option exercise:  $  10
Cost of stock buyback:                $ (20)
Total:                                $1000
Shares:               100       Value:  $10/share

Year 2:  
Assets net of liabilities:            $1000
Add Income:                           $  10
Proceeds from stock option exercise:  $  10
Cost of stock buyback:                $ (20)
Total:                                $1000
Shares:               100       Value:  $10/share

And so on, year after year

The company I constructed is worth $10 per share, no more and no less. Because that's all the owners can get out of the company. Ever.

Assume they figured they could get more. The only way they could do so would be to stop issuing those dilution creation devices. Which presumably are underpinning those earnings of $0.10 (per share, per year).

Since the buyback is costing owners another $0.10 per share per year the company is running in place.

In the case of Cisco they are generating more cash than it costs them offset stock option dilution, since they are managing to reduce shares outstanding while spending 100% of free cash flow to do so.

However, they are not increasing the value to shareholders at the total rate of which they are generating cash. Cash comes in, cash goes out, assets remain the same but shares are reduced. So the owners (who didn't sell) end up having their assets increased, but only by the % decrease in share count, not by the total free cash flow.

In the recent report we can see Cisco has maintained shareholder equity essentially flat but decreased shares outstanding by 2% over the past year. So this has increased the net worth of shareholders by a smidge over 2%.

Approximately equivalent to a daily interest savings account.

John
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