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) - Get Report

, 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) - Get Report

and

Apple

(AAPL) - Get Report

, 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.

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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)

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.

So the company would have to make a tough choice: Pay a dividend, which could actually drive the stock down because it would cut EPS growth, or accept the current state and hope corporate IT spending substantially picks up.

Let's assume it chooses the dividend option: Taking the $5.8 billion in adjusted free cash flow over the last 12 months, and assuming it cuts the buybacks by 75%, leaves $3.2 billion. The company easily could have paid out 65% of that, or $2.1 billion. That would have been 33 cents for every diluted share paid over the past 12 months, or a 1.9% yield at the current quote. That doesn't make up for the 11% decline in the stock year-to-date, but it is surely better than nothing.

A special dividend is another, and much better option for Cisco. Even after the company's massive share buybacks, it has $13.5 billion in cash and zero debt on its balance sheet, and generates massive cash flow each quarter. The company could easily hand out half of that, which would equate to $1.06 per diluted share (6.2% of the current share price).

The cash on the company's balance sheet is doing absolutely nothing; it makes sense to give it back to shareholders, who are basically treading water at this point. Come on, John Chambers! Think of the average joe who's still hanging on to his 100 shares. Pay out half of your cash, and give him $100! That's enough at least to drown the sorrows of being a Cisco shareholder.

Of course, there is the option of ousting John Chambers from the company, as so many of those writing me (including a few Cisco employees) have suggested, but I'm not holding my breath.

P.S.: Kudos to Merrill Lynch for pointing out the deterioration in Cisco's reporting quality!

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In keeping with TSC's editorial policy, Comeau doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Michael Comeau performs stock analysis for

ActionAlertsPLUS

and

Stocks Under $10

. His market interests include consumer technology, retail, and small- and mid-cap financials. He appreciates your feedback;

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