Cisco Systems: Repatriation Tax Hit
Summary @Cisco Systems faces a large tax bill from the mandatory repatriation of foreign earnings. The #tech giant has one of the largest cash balances impacted by the tax law. The current capital return plan is solid, but the net payout yield fails to impress. One company flying under the radar of the mandatory tax repatriation of foreign earnings is Cisco Systems (CSCO). The market constantly focuses on the other tech giants like @Apple (AAPL) and @Microsoft (MSFT) or new tech companies, but Cisco Systems actually has one of the largest balances of cash stashed in international locations. The networking equipment giant is overlooked due to years of lackluster growth. The tax repatriation rate hits the cash balances too hard to get interested in the stock. Huge Cash Balance According to data from Bloomberg, Cisco Systems has the third largest cash balance held overseas. The company far trails the balances of Apple and Microsoft, but investors might be surprised to know that Cisco has around $70 billion in cash with over 95% of the amount held outside the U.S. ￼ Source: Bloomberg After the FQ1 report for the period ending October 28, Cisco now has a total cash balance of $71.6 billion with only $2.5 billion held domestically leaving $69.1 billion overseas. The amount is even more meaningful considering that the market cap is around $192 billion. The bad news is that Cisco has an incredible $35.9 billion in debt. The company actually only has net cash of $35.7 billion or somewhere around 18.5% of the market value. A large amount for sure, but not enough to greatly alter any investment decision. The new tax law (see KPMG insights for more details) requires companies to repatriate foreign profits accumulated since 1986 at a 15.5% rate for cash and 8.0% for less liquid, non-cash assets. In such a scenario, Cisco could face a $10.7 billion tax bill on the $69 billion in cash held on those foreign earnings. The company does have up to 8 years to pay off the tax bill. So what started as a good story ends up with Cisco having somewhere around a net cash balance of only $25 billion. If the tax repatriation rate was below 10% or even a tax-free holiday as sometimes speculated, the company would have more of a cash windfall to boost capital returns and investments. Large Capital Allocation Plan Doesn’t Impress Cisco Systems has a large capital return plan so any cash freed up by tax repatriation could possibly help shareholders. The company has strong and consistent cash flows with $3.1 billion generated by operations in FQ1 and $13.9 billion last fiscal year. The company highlights how capital returns are consistently large and a great portion of the cash flows. Over the last 5 quarters, Cisco Systems returned at least $2 billion per quarter that amounts to over 1% of the market cap. ￼ ￼ Source: Cisco Systems FQ1’18 earnings presentation Unfortunately, Cisco doesn’t offer huge value based on how the capital return stacks up compared to the market value. The net payout yield (dividend yield plus net stock buyback yield) is only slightly above 5% due mainly to the 3% dividend yield. ￼ CSCO Net Common Payout Yield (TTM) data by YCharts As the company states in the FQ1 release, Cisco Systems has spent an incredible $101.9 billion on stock repurchases by retiring 4.8 billion shares. In essence, the company has always spent any excess cash regardless of the perceived valuation of the stock. As an example, the stock trades at about 15x forward EPS estimates and the company shows no signs of basing future stock repurchases based on deep value as opposed to just a market value. A better option is to spend the valuable resource only when the stock is exceptionally cheap. Takeaway The key investor takeaway is that despite one of the largest cash balances impacted by the mandatory repatriation tax in the GOP tax bill, Cisco Systems isn’t going to end with any outsized net cash balance. The lackluster growth story just doesn’t make the stock overly appealing after taking this hit to cash balances.