Checking Cisco's Buyback Math

When the selling gets tough, the tough buy back their stock.

Some observers see Cisco's (CSCO Quote - Cramer on CSCO - Stock Picks) decision to expand its stock buyback program by $7 billion Tuesday as another sign that networking gear isn't about to start flying off the shelves.

"It plays into a theme that started a couple years ago," says Legg Mason's Timm Bechter, referring to a time when Cisco, like nearly all tech shops, saw an era of double-digit sales growth turn to stagnation and decline as demand dropped off.

"You could look at it as a way of treading water," says Bechter, who has a neutral rating on the stock. On Wednesday, Cisco fell 56 cents to $20.59.

Cisco is at a rather uncomfortable crossroads after a brilliant decade or so. Its big corporate customers haven't started buying again, leaving the San Jose-based networker to seek other means to reprime the growth machine. Meanwhile, there's no shortage of competitors eager to drain Cisco's opportunity.

Other cash-rich, growth-light shops like Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) and Qualcomm (QCOM Quote - Cramer on QCOM - Stock Picks) have heeded Wall Street's demand to see the money. Both those tech giants have opted to return cash to shareholders in two ways -- via dividends as well as share buybacks. Cisco, on the other hand, has remained steadfast in its refusal to pay dividends.

To keep investors happy, Cisco has been employing a good portion of the $1 billion in cash it generates each quarter to buy back its stock. With $21 billion in cash on hand, Cisco has plenty of leverage to apply to this strategy.

But with Cisco's passion for the employee stock option, some question who is getting paid first in the process -- shareholders or employees.

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