As we head into the weekend, I am thinking about the tech-stock giants. I get asked about these stocks all the time, it seems. Aren't Microsoft , Cisco Systems and Intel super cheap now and worth buying as value stocks? After all, all the cool kids are doing it right now. David Einhorn is buying Microsoft and calling for Steve Ballmer's removal as CEO. Even old-line value guys like Tweedy Browne and Bruce Berkowitz are buying Cisco this year. Intel is held by value folks like David Dreman, Joel Greenblatt and Ruane Cunniff. The stocks are paying dividends and look kind of cheap on traditional metrics. The big three growth stocks of the 1990s are now the subject of intense discussion among value investors and I became curious enough to do some research. My first thought is that somebody needs to get this message to Cisco's John Chambers, Ballmer and Intel's Paul Otellini, and the boards: you are no longer running growth companies. These people are now managing huge, mature companies that dominate their respective industries. This is a good thing. Their companies met the goals they set decades ago and are the new blue chips of industry and the stock market. This means they must change their fiscal management policies. They don't need those huge piles of cash. All three of them generate billions of free cash flow a year far in excess of spending needs. It is time to return that money to shareholders. I do not mean stock buybacks that just mask options expense either. I mean actual cash dividends paid on a regular basis to shareholders. They should probably think about a special dividend to give us some of our money back as well. Make no mistake about it, it is our money. Only Microsoft has more than 1% ownership by insiders. Even the 10% ownership by Mr. Softee insiders is not enough to justify sitting on the cash without sharing with outside shareholders. They don't need it for acquisitions or expansion. The cash flow is more than adequate for any bolt-on acquisitions needed to protect and grow the business at a decent rate. Using shareholder cash for a big, splashy acquisition is going to be a mistake that only serves to diversify the business. They have strong franchises with huge moats and should focus on protecting and serving existing business so we will all make money for decades to come. Looking at the numbers is an interesting exercise. Cisco has $43 billion in cash on the balance sheet right now. Defining free cash flow as cash from operation minus necessary capital expenditures, I find that free cash flow for the past five years has run roughly between $8 and $10 billion. It spent $7.5 billion last year buying back stock. Shares outstanding only went down by about 9 million shares. That's a waste of shareholder cash. The same expense dividend level of $1 a share would cost less than $6 billion and reward shareholders, not just offset options grants. Cisco does not need the money for research and development either. The $5 billion or so they spend to develop innovative new products to keep up with the marketplace is subtracted out as an expense in the income statement. The numbers at Intel look pretty much the same. They spent $6.5 billion on research and development, a necessary expense to protect its markets. But that is already expensed in the income statement. Free cash flow has ranged between $5 and $10 billion the past five years. Currently the company has $12 billion or so in cash after spending billions last year on acquisitions, including the mega deal for McAfee. One thing Intel gets right is that it spends more on dividends than stock buybacks and has done a decent job of increasing the payout each year. Microsoft is also similar. It spends roughly $8 billion to $9 billion a year on research and development to stay ahead of the pack. Free cash flow is a staggering $20 billion or more annually. About $11 billion is spent on stock buybacks, compared to a little more than $4 billion on dividends. It has $50 billion of cash and equivalents on the balance sheet. It can pay a large special dividend and triple the current annual payout and never miss the money. Of course, the real point is that it's not their money to miss and they need to focus on returning cash to shareholders. The big three do look kind of cheap on some traditional measures. But they are not bargains until the mindset of management is changed. They are not growth companies anymore, but market-dominating mature companies that need to start thinking more about rewarding shareholders. The growth days of constant acquisitions and large options grants for employees are over. You are all grown up now and a raging success. Congratulations! Now pay me my money.
