Valuing Cisco: Cash/Investments = 47% of Market Cap; Now a Serious Dividend Play
It’s time to look seriously at Cisco (CSCO) as a dividend growth stock. After years of underperforming compared to other big high-tech firms, the networking giant looks poised to catch up to its peers in the enterprise technology arena.
After first paying a dividend in 2011, it has quickly upped the ante. In mid-August it raised the quarterly rate 75% to 14 cents quarterly from 8 cents. Dividends can be cut in times of financial stress, but when companies set a payout rate, they normally expect it will stay steady or rise in future years. Nobody sets a quarterly rate with the expectation of cutting it. So Cisco’s announcement signals “stabilization we've seen in our business and our confidence going forward,” as Frank Calderoni, Executive Vice President and Chief Financial Officer said in the August earnings call.
Cisco has certainly been a painful holding for investors. It has lagged most of the other giant tech investments over the last five years. Here in a stock chart we compare IBM (IBM), Intel (INTC) Microsoft (MSFT), EMC (EMC) and Oracle (ORCL).
Over the last month, Cisco has sprinted ahead of those peers, driven by better than expected fourth quarter earnings, and the accompanying boost in its dividend rate.
Despite that recent spurt, Cisco looks very conservatively valued on the basis of its PE ratio. In addition it has $48.7 billion cash and investments, equal to almost half its $103.1 billion market cap.
And its current indicated 2.84% dividend yield, is amply covered by cash flow. At the current rate, it will pay out about $3 billion in dividends during fiscal 2013. Last year its cash flow from operations was $11.5 billion. Cisco said in August that it plans to spend about 50% of its cash flow on dividends and stock buybacks, so it has ample protection for the dividend. The yield looks generous compared to most of its peers.
Over the past five years, Cisco’s EPS growth rate has been more volatile than that of most other big cap tech companies-- semiconductor giant Intel, excepted. But its 21% growth leads the pack over that period.
Its five-year revenue growth rate may not be exciting, but it’s better than many other large-cap, enterprise-tech stocks.
Cisco remains by far the leader in revenue among providers of equipment for connecting computers. Revenue last year was $46.1 billion. That means it is sensitive to economic trends, especially slowdowns in major economies like Europe. Indeed, fourth quarter growth slowed to 4% from 7% for the full year. But it also benefits when governments react by boosting infrastructure spending, because its technology is almost inevitably part of any big new project.
The question for investors, of course, is whether Cisco remains a growth stock. The short term answer is “just barely.”
In the earnings call of Aug. 14, Cisco said that during the current quarter it expects revenue growth of just 2% to 4%. And it forecast that earnings per share will rise 5% to 9%. Still, the power of stock buybacks in reducing shares outstanding should make it possible for Cisco usually to deliver low double digit EPS gains, with single-digit revenue growth. That’s a formula that has powered IBM’s stock for many years.
At its current dividend level, Cisco is paying investors more than Treasury rates to wait for an upturn in the networking business.