Cisco has turned around the slide in the stockmarket with an announcement that they are buying back $10Bn worth of stock. Investors are obviously happy given that this has driven the companies stock up, and other tech stocks have risen on the news. This is just in a way considering that a poor earnings report from Cisco is a major factor in the Nasdaq getting the jitters over the last few weeks.
Its worth looking at other possible reasons for this move though. Cisco has long been a very profitable company. Like many tech stocks it does not pay dividends so share buybacks are the prime way that they return surplus back to shareholders. They also have huge reserves of money they have little to spend on. A major part of Cisco’s growth strategy in the past has been acquisitions, but in their current business there is not much left to buy without putting them in the crosshairs of regulators. Moving into a new area of business is risky, but they are still very profitable and so build up large surpluses of cash. Before the buyback they had something like $27Bn.
In most companies today executives aren’t rewarded on concrete things like profit and revenue growth, they are rewarded on stock growth. Even if they are not directly given shares and options to incent them, it is the shareholders that approve their pay rises. SO upward share prices are good for executives. If you are a Cisco executive and your stock price was going down for no good reason. And you had a lazy $27Bn on the books you had nothing else to do with, what would you do?