The new Cisco: Slower growth, higher dividend

October 18, 2012: 10:56 AM ET

Rocky times have precipitated a change in tactics at the maker of networking gear.

FORTUNE -- Cisco's (CSCO) days of double-digit growth may be over, but the tech giant has made some smart moves over the last couple of years—like cutting costs, focusing in on its most promising businesses, and giving out a quarterly dividend to shareholders for the first time in its nearly 30-year-long history. As the company's chief financial officer, Frank Calderoni has played an instrumental -- and behind-the-scenes -- role in many of these shifts. We caught up with him to discuss the strategy behind Cisco's hefty dividend, how its turnaround efforts are working out and what it will take to get its stock back up.

FORTUNE: Why did you decide to start paying a dividend after so many years?
Calderoni: We're in a fortunate situation where we have close to $50 billion on our balance sheet. As a result of the amount of cash and our financial performance we have a shareholder base that's interested in getting a good return. For a number of years we were primarily focused on providing them a substantial return of cash through our buyback, which we started in 2002. But what we found by listening to our shareholders and understanding what's important to them is that they wanted capital allocation. Part of it has to do with the amount of cash that we have, but also there's been a growing trend with investors to look at a dividend.

About two years ago we introduced a dividend. And just this past August we made a very bold step of an aggressive increase in the dividend to the point that now we're one of the highest paying yielding dividends. We also laid out a framework for the future which we call the capital allocation strategy. This says that every year, on an annual basis, we will return 50% of our cash flow. Investors wanted more certainty and they were looking for a statement from us that we felt comfortable about our business going forward. We see our business continuing to grow continuing to generate cash and that we're willing to return that cash.

How is Cisco's overall strategy working out?
If you step back over the last year or so, we have transformed the business and moved away from going after many different opportunities and are staying more focused around our five foundational priorities. We did a lot of work internally around that, and identified business leaders to drive those foundational priorities and made sure they had the right metrics. We also had to take $1 billion out of our run rate over a year ago. I think the investors were appreciative of that. We said we'd do it in about three quarters, and we did it in about two quarters, so they were impressed with that. I think there were some skeptics early on because of the magnitude of the $1 billion and knowing that it's not easy. One of the other things that we did as part of that process was to reframe the financial model for investors. So we were talking about larger growth opportunity in the 12% to 17% range back several years ago. With the refocus on the five foundational priorities we took that rate and said 5% to 7% revenue growth.

Cutting costs is one thing, but where will your revenue growth come from over the next few years?
The data center business is probably showing the highest growth. If you go back a few years ago we were not in the data center market, now we're now number three from a market share perspective. We've got very leading-edge products in the data center and we see that continuing. The second thing I would say is security. There's also wireless and what's happening with wi-fi networks and video and collaboration. And there's our services business--with that we see more of a software and services opportunity.

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Are you hiring again?
Despite all of the downsizing that we were doing, we've also invested. Because whenever you have shifts in your portfolio you have different skills needs and you have geographic needs—we have higher growth in some of the emerging markets and so we've been hiring in other places around the world. We have a large concentration in India, China, Russia and Brazil.

Is Cisco's stock undervalued?
Of course we had the great recession several years back and other events that have affected our business. On the other side I think the realignment that we've done is starting to show. We're focused now. So I think with that and our recent financial performance and our capital allocation, it's a good example of when you have the execution on the performance and the connection with investors around shareholder return then you start bringing improvement on stock price. And the stock price has performed much better in the past year.

You've been named as one of about 10 potential successors to CEO Chambers. Can you see yourself running this company?
I love what I do. I think I'm very fortunate to be part of Cisco. I've been here for over eight years, and it's been a very rewarding experience. The last year and a half have been challenging but also rewarding because we can get in there and really make a difference. I can continue to do this. John talks about moving talent around. I can look at something else. We'll just see how things go.

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About This Author
Michal Lev-Ram
Michal Lev-Ram
Writer, Fortune

Based in Silicon Valley, Michal Lev-Ram covers enterprise and mobile technologies for FORTUNE. Prior to joining FORTUNE, she wrote for CNNMoney, Fast Company, Popular Science and other business and technology publications. She was also a staff writer at Business 2.0 and holds a B.A. in journalism from San Francisco State University.

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