Why the $10 Billion Cisco China Investment Is Even Larger Than It Sounds

Cisco Systems Inc. (NASDAQ: CSCO) has a lot of changes coming its way. On top of John Chambers handing the CEO baton to Chuck Robbins, Robbins already set his new team structure to be more nimble than the company has been. A fresh news release about Cisco investing in a large set of partnerships in China may be much larger than the massive sum even sounds.

Cisco’s plan to boost its investment in innovation and development in China was said to be more than $10 billion in total. While this may not be a single-day stock moving announcement, there may be much more to this news than meets the eye. As a reminder: Cisco was named by 24/7 Wall St. as one of 10 stocks to own for the next decade.

Cisco said that it is striving to support local innovation, industrial transformation and growth through a series of strategic partnerships in China. While this is said to be continuing over two decades of commitment and investment in China with its Chinese partners, that $10 billion commitment was shown up front to be over the next several years.

The announced deal was also as Chambers and Robbins visited China and met with Chinese Vice Premier Wang Yang and other government and agency leaders in China.

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Cisco said that it has signed a memorandum of understanding with China’s National Development and Reform Commission to expand investment in China. The targets are innovation, equity investment, research and development and job creation. Cisco also said that it has signed a memorandum of understanding with the Association of Universities of Applied Science to invest in a four-year program with 100 universities.

One interpretation here could be that Cisco is signaling it is now getting a fresh new government-backed endorsement after the NSA and spying allegations and reports that have been out. This can be argued against by some as well, but it was no secret that orders from China and many nations went south after all the NSA spying reports that came out.

Cisco obviously wants to thwart Chinese players from getting all of its orders. A note from Dow Jones said that sales in China were down by 20% from a year earlier in its latest quarter. Owen Chan, chairman and CEO of Cisco Greater China, was quoted in Cisco’s release:

Together with our Chinese customers and partners, Cisco has witnessed milestones in the development of China’s booming technology industry since entering the country in 1994. In the future, Cisco will continue to work closely with the government and local partners on national development programs to better meet demand in the local market, provide better products and services to Chinese customers, create tremendous business value for Chinese companies, and contribute to China’s transformation, technological innovation and economic growth.

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Now, let’s put this added $10 billion commitment into focus. Cisco’s market cap is $146 billion, and much of its more than $55 billion in cash and equivalents is locked up overseas. After all, Cisco’s recent $5 billion bond sale was partly earmarked for its capital return plan to shareholders, including the repurchase of common shares and cash dividends. Cisco repurchased some 35 million shares for a total of about $1 billion in the most recent quarter, and Cisco still has roughly $5.3 billion remaining under its current buyback plan, with no termination date. Cisco has spent $91.7 billion in total share buybacks.

This $10 billion also compares to a total goodwill on the balance sheet of $24.4 billion. Now consider that $10 billion compares to the net income in each of the past three years as follows:

  • $7.853 billion in 2014
  • $9.983 billion in 2013
  • $8.041 billion in 2012

Cisco shares were up only two cents to $28.73 in late afternoon trading on Wednesday. Its 52-week range is $22.49 to $30.31, and it has a Thomson Reuters consensus analyst price target of $31.20.

Even after the recent reorganization, Cisco remains a stock to own for the next decade.

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