Cisco Investors Are Curious About A $20 Billion Tax Holiday For Buybacks And M&A, But Will It Happen?

Cisco Systems, Inc. CSCO would benefit from a potential tax holiday as it could unlock $20 billion in repatriation tax to focus on M&A, dividends or share repurchases, according to a note from RBC Capital Markets.

Mitch Steves said 97 percent of Cisco's $59 billion plus cash being held overseas and a tax holiday would prove to be materially beneficial for the company as it could release approximately $20 billion of value (tax savings). It would also unlock the full value of $59 billion in spending power.

"if a repatriation tax holiday is seen we would become notably more bullish on Cisco and note that it could result in 1) ~$4B in purchased revenue, 2) four years of paid dividends or 3) a 14% reduction in total shares outstanding," Steves wrote.

According to the note, if Cisco is able to use its cash for M&A purposes, this would add about $4 billion in annual revenues. Steves noted the company would likely focus on Software, Networking and Security acquisitions where the typical take out valuation is in a range of 4.0-5.0x sales.

"Using the assumed inorganic sales contribution of $4B, this would lead to an incremental 8% to the top-line which could generate an incremental $0.20 per year (+9% accretion) assuming a ~30% operating margin profile," Steves highlighted.

On the other hand, assuming Cisco uses the $20 billion for dividends and buybacks, it would support an annual dividend of $1.04 a share for about four years. If the funds were used to repurchase shares of common stock at about $28 per share it would cut outstanding shares by 14 percent or 717 million shares.

"Notably, Cisco targets 50 percent of FCF return to shareholders implying that repatriation could temporarily inflate this payout ratio," Steves added.

However, the analyst said a potential repatriation tax holiday scenario is unlikely as the country faces the Presidential election this year.

Steves has an Outperform rating and $31 price target on Cisco.