Dear Mr. Chambers: Show Me the Money

This column was originally published on RealMoney on Nov. 10 at 3:32 p.m. EST. It's being republished as a bonus for TheStreet.com readers.

After my last piece on Cisco(CSCO Quote), quite a few readers emailed me on the question of whether the company should offer a dividend.

After Wednesday night's snooze fest of an earnings report, it's time to seriously explore that issue, because we're obviously not seeing much growth.

For the October quarter, the eternally acquisitive networking-equipment giant grew revenue an underwhelming 9.7% year-over-year and operating earnings a respectable 15% to 25 cents a share.

However, net income grew by only 8%, implying that much of the EPS growth came from buybacks rather than actual operating strength.

It's clear from the chart below that Cisco's glory days are over, and even with an acquisition spree, revenue growth is unlikely to exceed the 10%-12% range going forward.

So if Cisco can't grow enough to please growth-starved investors who are finding greater potential upside in names like Google(GOOG Quote) and Apple(AAPL Quote), maybe it should pay a dividend.

In my opinion, free cash flow is a better metric than earnings when evaluating dividends. Over the past 12 months, the company has generated a whopping $5.8 billion in free cash flow (I included $838 million in net cash paid for acquisitions in this calculation). However, the company also bought back $10.7 billion in stock over the same time period.

So, in order for Cisco to sustain regular dividend payments, it would have to cut down on the buybacks and deals. I have zero faith that the company will cease making acquisitions; but a cut in buybacks is a possibility.

The buyback issue is key. Most companies' share buybacks only serve to offset dilution from employee stock options. Does anyone really think that the buyback announcement from Whole Foods(WFMI Quote) Wednesday night counts for anything?

Cisco Quarterly Revenue

Source: Capital IQ

But Cisco is the rare company that actually reduces its share count through buybacks, which is a key factor in the company's EPS growth (which hasn't been so hot). If Cisco were to cut options issuance, it would be bad for recruiting new talent, and EPS growth would slow due to a steady or slowly rising share count.