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!