Cisco Systems, Inc. (CSCO) Dividend Stock Analysis

Whoa!  Shaking off the cobwebs on  my full-on dividend stock analysis skills here.  It’s been quite some time since I’ve independently wrote an article on one dividend stock out there.  Given that my busy season has wound down, I though tit would be a great time to shake the rust and really dive into a company that I not only own, but is a highly visible company in the market place.  With the tides in the market thus far this year, the increase of rates, the election, etc.. the stock market has never been so unpredictable.  With that, we need to have a sense of security to the cash we have saved in order to deploy the appropriate capital to a company.  In terms of security – here is dividend stock that is of high quality as it relates to network and data security… Cisco Systems, Inc. (CSCO).

Cisco Systems, Inc. (CSCO) Background

From Google finance, “Cisco Systems, Inc. designs and sells a range of products, provides services and delivers integrated solutions to develop and connect networks around the world. The Company operates through three geographic segments: Americas; Europe, the Middle East and Africa (EMEA), and Asia Pacific, Japan and China (APJC). The Company groups its products and technologies into various categories, such as Switching; Next-Generation Network (NGN) Routing; Collaboration; Data Center; Wireless; Service Provider Video; Security, and Other Products. In addition to its product offerings, the Company provides a range of service offerings, including technical support services and advanced services. The Company delivers its technology and services to its customers as solutions for their priorities, including cloud, video, mobility, security, collaboration and analytics. The Company serves customers, including businesses of all sizes, public institutions, governments and service providers.”

My own take – CSCO has a wonderful balance sheet, with a great load of current assets to purely cover their current liabilities multiple times.  They are on a share re-purchase binge right now, spending billions to buy back their shares – see why I love stock repurchases!  They are a massive company that employs almost 75,000 companies and are a world-wide leader in Information Technology.  Also, I wanted to review them for other personal reasons – as I do not own them and do believe that information data protection is highly critical in today’s information age that we are in, no doubt.  Therefore, I will use our Dividend Diplomat Stock Screener to help measure them up!

CSCO Stock analysis

1.) Dividend Yield – Ah, yes, one of my favorite metrics.  With the CSCO’s stock price closing on March 17th of $34.23 and an annual dividend of $1.16, this equates out to a yield of 3.39% – which is close in proximity to my overall portfolio yield at the moment, due to the surge in the stock market.  Further, this is at least 110 bps above the overall market as a whole.  Oh it doesn’t end there.  CSCO also has a current dividend yield of 60 bps higher at the moment then their 5 year dividend yield average.  I love it so far.

2.) Dividend Increases – This one is also another fun category.  They are not quite a dividend aristocrat, BUT – they have increased dividends for a solid 5 years straight, VERY impressive.  Not only that, but back in mid-February CSCO actually increased their dividend 11.5%, which is very consistent in their growth rate patterns.  Not the greatest amount of dividend increase history, but they have it and they scream.

3.) Payout Ratio – Of course, during these uncertain economic times, I am very hard on why this is a very important piece to any dividend stock analysis.  Earnings per share based on 33 analysts have current year projected at $2.38.  With a dividend of $1.16 per year, this sits at a 48.7%, or smack dead in the middle of the 40-60% range that we typically prefer.  Forward EPS for 2017 is established at $2.50, which then leads to a 46% ratio, overall, very good and leaves plenty of room for further growth.  Comfortable where this sits.

4.) Dividend Growth Rate: Now, we know that dividend increases impact your overall portfolio in a substantial fashion.  How does CSCO truly stand with their dividend increases in their short 5 year span?  Well, an 11.5% increase was just announced, but how does this really stack up?  Their 5 year dividend growth rate is approximately 15% and the 3 year dividend growth rate at a little above 15%, as well.  If CSCO continues, I can see the dividend increasing another 3 cents per quarter/12 cent increase per year going forward.  I feel like their dividend growth rate can be maintained in the 7-11% range for the upcoming 3-5 years.

5.) Price to Earnings: The stock closed at $34.23.  Therefore, based on current year EPS projections, the P/E ratio is 14.4, which is still far below the overall market on average.  If you consider their forward EPS expectation of $2.50, then we are looking at a forward P/E ratio of 13.7.  This is not bad at all and also shows strong signs of undervaluation, very interesting.

Damn… CSCO seems to be a great stock, right?  The one fun caveat is – they are in the “technology” industry, so one just keep that in mind, as their P/E ratios for legacy companies such as Intel (INTC), International Business Machines (IBM), etc.. traditionally have had lower price to earnings ratios.  In addition – CSCO is up a MASSIVE 13.27% this year to date already – aka – holy smokes!  That’s a lot of upward price movement for a short 2.5 months, you know?  Outside of that – what’s not to love about them?  They have a solid yield, above the market – a solid footing on dividend growth, with high increases to boot, show undervaluation signs in the P/E and room for their dividend to continue it’s growth path.  Dammit, right?  Hmm… this one may really need to keep the close monitor at the time being, especially because I own both INTC & IBM, but not saying they operate in the same sector slice at all within tech, but something for myself to consider.

Conclusion on Cisco Systems, Inc. (CSCO)

Overall, very pleased with what CSCO brings to the table.  They have a great brand recognition within their industry and I know full-well that my clients in public accounting have large and long-term contracts with them for their network and network security services.  Obviously they have taken a nice ride up the first big hill this year with the price appreciation, but what’s impressive is that their metrics above are still impressive as heck!  This could be due to a few things – repurchases of massive amounts of shares, solid earnings, improving margins, etc..  It’ll be a few months until we can see their 3rd quarter results, due to their off-the-normal year end schedule.  Very interesting and I will be keeping a close eye on them, that’s for sure.

What about you?  What do you think of this stock?  Do you already own shares?  Does the company that you may work for use them for their services?   Any concerns with the industry, the price change or anything that we should know about?  Appreciate the input everyone!  Last question, I promise – would you buy them?  Boom, question asked.  Talk soon ya’ll and hope you had a nice weekend!

-Lanny

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24 thoughts on “Cisco Systems, Inc. (CSCO) Dividend Stock Analysis

  1. I really like Cisco! On the top of the low P/E and safe dividends, a possible change in the US tax policy would encourage the repatriation of money held abroad, which would give a further kick to the share repurchase and dividends (and ultimately the share price).

    • Roadrunner –

      Interesting, never thought of that. Definitely think the share repurchases are great for them. They were slightly up, just a smidge, today. Most companies took a little skid, very interesting here.

      -Lanny

  2. Hi, appreciate the write-up. I liked (and continue to like) Cisco for the reasons you laid out. The only worry is that they are still heavily reliant on their traditional hardware – routers and switches. However, they make good progress in software and cyber. It’s like ESPN and Disney: much too like, little to worry about 🙂

    Cheers,
    Tall Investing

    • Tall I –

      Hilarious phrase to put it – too much to like and too little to worry about. They are interesting though, not your “sexy” space to talk about within tech, when you have Google, Apple, Microsoft, Intel, etc.. being the big players and names – network security just isn’t up there, right? haha

      Glad you like them and seeing the feedback, I am smirking a little bite more. Solid company.

      -Lanny

    • Captain Div!

      Awesome! I see that you are “seeing” what I’m “seeing”. Excited you’re able to snag shares of a solid company as it appears. I bet you’re looking forward to their divvy’s no doubt. Keep us posted!

      -Lanny

  3. Nice analysis on the tangibles. The intangibles are my concern. Rumors of an Ericsson merger/venture (denied by ERIC). Impact on China growth due to restrictions on advanced technology exports (current rules). If a firm, fair and consistent trade policy emerges from Washington then I see upside potential. If not, at least they have a cash hoard that has the flexibility to be repatriated, redeployed overseas or re-engineered (similar to Apple).

    • Charlie –

      Very good points you brought in, for sure. What’s hard with the trade policies and other rumors – it may be short-term or long-term in terms of decisions being truly made and put in place. Think about that – that’s what always is a looming item – if it occurs and when will it? Kills me!

      Great points, Charlie, appreciate the comment.

      -Lanny

  4. I like these big companies that produce cash like nobody’s business. I think Cisco had something like 12.5B in FCF the past calendar and they’re using that money and an awesome balance sheet and that’s great for flexibility and being able to buy companies of any size to fuel future growth.

    I don’t Cisco is going to return 20% per year but if you can get in at a solid price point(it was in the mid 20s just a year ago!), it should be a solid performer long term with some good chances at being involved in whatever the next big thing is due to their ability to buy into it.

    • Time –

      Damn… and actually – they had over $13.5B from operating cash flows per their last 10-K… WOW.

      Yes – the awesome balance sheet I cannot argue – they can move this, that, those, these ways, etc.. they can pick, choose, take their time and control what is happening.

      I like the mention of the balance sheet, as that’s something that has stuck out to me, as those companies with stronger balance sheets typically face any headwins stronger than others… I’ll keep you and everyone posted with any move I make!

      -Lanny

  5. I am a fan of CSCO. It was actually the first dividend stock I ever owned and was able to collect on. It has been doing very well for me thus far. From a consumer standpoint, I work in IT and any company I have worked for used them in some way. So I know they have very popular brand recognition. Even though they don’t have too many years of dividend increases, they have the financials to back them up. And with their share price at such a low amount (compared to others in the industry), I think they are a solid choice.

    • DDaze –

      Wow.. the first one, huh? I bet you’ve enjoyed them, as you’ve written, since you’ve owned them. Solid choice eh? Yes – their metrics are very nice, balance sheet is sound & solid. Great to know someone here in IT has a perspective, as well, helps really cover areas of a spectrum. Truly appreciate your comment, thank you!!

      -Lanny

  6. Cisco is a great company and it is one of the few tech companies I have in my portfolio. It has a huge first mover advantage and its products act like a toll booth of sorts for the ‘internet highway’. The future is bright as well with increased connectivity and the internet of things.

    • Money Grower UK –

      What % position do you have, if I don’t mind asking? Interested in more? Are you therefore “bullish” on them? It seems like you are, and I think it’s great that there are different perspectives in the comments. I’m trying to poll it out all and see where I officially stand in the feedback, other details and evidence to help make a decision, as well!

      -Lanny

  7. Great writeup! CSCO, INTC, and QCOM are 3 techs on my watchlist. Still waiting for a pullback in the markets. The Trump train took me by surprise!

    • MII –

      Appreciate the comment! What’s your favorite of the 3? Love the pullback we received today, want/need/rooting for it to continue! As long as fundamentals are still sound… that is!

      -Lanny

  8. I bought Cisco at a much lower valuation in January 2016, but I think it’s a hold for now. I would like to see the company invest in growing its revenues rather than putting so much into share repurchases.

    • Brian –

      Appreciate the input and nice work getting it at a lower price point – they’ve had quite the run up this year. Right… should invest more into the business then “playing” with earnings figures…

      -Lanny

  9. Cisco is an interesting company although I usually don’t prefer tech stocks. It’s a market where a company can fall quickly if they miss the next big thing, so a bit more risk than average.
    For me personally there is the problem with the dollar. As we all know it’s very strong at the moment. For a European investor that makes all US stocks more expensive, so not really motivating to buy any US stock at the moment…

    I do have a question. Where do you find 5 year average yield percentages and PE’s? Is there a free source to find them?

  10. Agreed with your analysis. Revenue and income has been stable. It’s on my watchlist, everybody is waiting for the same pullback.

    You know what that means… the mkt is going higher. 🙂

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