Monday, November 9, 2009

Cisco demonstrates enviable cost of capital (CSCO)

Cisco (CSCO) placed $5billion in debt with investors, at very attractive prices.

From Bloomberg:

"The 5-year notes priced to yield 2.955 percent, or 67 basis points more than similar-maturity Treasuries, the 10-year securities pay 4.469 percent, or a 100 basis-point spread, and the 30-year bonds priced to pay 5.679 percent, or 130 basis points, Bloomberg data show."

Cisco last sold debt in February, issuing $4 billion of 10- and 30-year bonds, Bloomberg data show. The sale was split between $2 billion of 4.95 percent, 10- year notes that priced to yield 200 basis points more than Treasuries of similar maturity, and $2 billion of 5.9 percent, 30-year bonds that priced at a spread of 225 basis points, according to Bloomberg data."

One positive is the fact that the spread above treasuries narrowed from 225basis points (a basis point = 1/100th of a percent) to 130 on the 30year bonds. Simply put, the debt market looks at Cisco more favorably than they did in February. Well, that and there's a healthier corporate bond market.

My point is to show how cheap it is for Cisco to get its hands on money. The combined cost of debt in this deal was about 4.8% versus 5.2% in February. Right now Cisco's Free Cash Flow Yield(FCFY) is about 8.4% -->> that difference between cost of capital and return ON capital makes the shares a good buy. Certainly not as cheap as they were in March at a 17% FCFY, but a good buy nonetheless.

(FCFY based on market value net of cash. I discounted the cash per share from $6 to $4 to account for the offshore-nature of cash balances and possible associated taxes with repatriating that cash.)



Copyright 2009 AlphaNinja

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