Cisco’s dividend payment good sign for long-term prospects

Cisco Systems (Nasdaq: CSCO) has announced its first cash dividend: 6 cents to be paid quarterly. Cigars for everyone!

That translates to an annual dividend yield of about 1.4 percent at the recent share price. With roughly 5.5 billion shares outstanding, it will cost Cisco about $1.3 billion per year, just under 15 percent of its free cash flow in 2010.

Considering that Cisco already spent some $9 billion over the last 12 months to buy back its own shares, it seems quite committed to returning value to shareholders. And before you start complaining about the company’s stock-based compensation programs offsetting the value of those buybacks, know that Cisco issued only $3 billion in new shares over the same period. Thus, the total share count has been falling, leaving remaining shares more valuable.

Other major technology companies are following a similar model, spending more on buybacks than on dividends. This makes sense as long as a company’s stock is actually undervalued – otherwise overpaying for the shares is wasteful. The model also offers flexibility in times of need.

While cutting back on established dividends is frowned upon, reining in buybacks is not such a red flag.

Cisco’s current yield isn’t big enough to make it an income-generating powerhouse today, but that could change with steady raises over the years, or a blow to the underlying stock price.

Ask the Fool

Q: What are “unrealized gains”? – L.H., Shenandoah, Iowa

A: When you sell an investment, you usually realize a gain or loss. If, for example, you buy stock in Roadrunner Industries (ticker: BEEEP) at $25 per share and then sell it a few years later at $36, you’ll have a realized gain of $11 per share (less commission costs).

Meanwhile, perhaps you bought shares of Acme Explosives Co. (ticker: KBOOM) at $45 apiece and they’re now at $55. If you haven’t sold any shares, you’ve got an unrealized gain (or “paper profit”) of $10 per share. It’s your profit in theory only: Since you haven’t actually sold the holding, you haven’t actually realized the gain.

Q: What do chief financial officers do? – G.S., Keene, N.H.

A: A company’s chief financial officer (CFO), such as Hewlett-Packard’s Catherine Lesjak, Morgan Stanley’s Ruth Porat and U.S. Steel’s Gretchen Haggerty, is responsible for all things financial at the firm. These include determining what its financial needs are and will be, deciding how best to finance those needs, and informing all stakeholders (investors, creditors, analysts, employees, management) of the firm’s financial condition.

The CFO is also focused on creating and maintaining the best mix of internal cash, debt financing and stock financing for the company (this is known as a firm’s “capital structure”). The CFO plans and oversees the forecasting and budgeting process, monitors all cash flow, maintains relationships with funding sources such as commercial and investment banks, and oversees the process of developing and communicating the quarterly and annual financial statements.

Finally, the CFO has ultimate accountability for maintaining the books and records of the company, ensuring that the company’s assets are protected.

My dumbest investment

I purchased a company at 75 cents per share when it debuted on the market via an initial public offering. It’s now around 3 cents, and I’m seeing recommendations to buy it. Is it a good idea to purchase additional shares now to correct my original entry into this stock? I feel stupid for having bought into this. Help! – R.D., online

The Fool responds: First off, stocks trading for less than $5 or so per share are “penny stocks,” notoriously risky and easily manipulated to fleece naive investors. People think that they’re bargains due to their seemingly low prices, but even at 10 cents per share, they may be wildly overvalued. That 3-cent price might look great now, but since you wrote us, the stock has fallen pretty much to zero.

It’s a common instinct to want to make up your loss in a bad stock by either waiting for a turnaround or by buying more shares at a lower price. Don’t do that. It’s better to sell, take what’s left, and try to make up the loss in a different, better stock. Focus on quality.