Cisco as a Dividend Grower: Nice Start But We Explain Potential Trouble Ahead

Cisco Systems (CSCO) made a huge play for the affections of the ever-growing dividend crowd on August 15th, announcing a 75% increase in its dividend payout.

The move led to a quick hookup, as shares jumped on the news.

CSCO Chart

CSCO data by YCharts

The massive boost in the dividend payout is a deft attention getter, not just with yield-starved retail investors, but more strategically it raises Cisco’s profile among professional money managers such as equity income funds and pension funds that screen on dividends.

Until the announcement, the big dividend play in the tech sector was Intel.

INTC Dividend Yield Chart

INTC Dividend Yield data by YCharts

Factoring in Cisco’s new higher payments, the dividend yield is 3% based on the stock’s current price. A 3% yield is competitive with Intel (INTC), and a sizable premium to the 1.8% yield on the 10-year Treasury.

And at first glance, Cisco seems to have plenty of cash to easily afford the payout.

CSCO Cash and ST Investments Chart

CSCO Cash and ST Investments data by YCharts

Using YCharts Pro, Cisco’s dividend payout as a percentage of its available cash is a nice low 14%. That metric is based on the company’s reported total cash balance. The thing is, most of Cisco’s cash is sitting in foreign countries. Like many U.S. multinationals, Cisco chooses to keep the bulk of its foreign earnings in foreign accounts to avoid paying U.S. corporate tax. Cisco CEO John Chambers has been a vocal advocate -- can you get any more vocal than CBS’ 60 Minutes? -- for a corporate tax repatriation holiday that would enable U.S. companies to bring home their earnings at a reduced tax rate.

But dividends are paid out of U.S. cash balances, and Cisco reports it has around $6 billion in its domestic kitty. Cisco CFO Frank Calderoni said the new dividend payout would amount to about $2.8 billion a year. That pushes the effective U.S.-only cash dividend payout ratio to close to 50%. That’s not yellow-light worrisome, but it sure ain’t 14%.

It will be interesting to see the dividend growth path for Cisco going forward. It only initiated a dividend payout last year.

INTC Dividend Chart

INTC Dividend data by YCharts

Clearly the one-time 75% hike was meant to get Cisco front and center in any dividend evaluation, especially within the tech sector. Mission accomplished on that front. But absent a corporate tax holiday Cisco will need strong U.S. demand to produce the free (domestic) cash flow that can generate strong dividend growth.

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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