By Siraj Sarwar
Cisco Systems Inc. (CSCO) is one best growth stories of recent days. Over the year, Cisco has shown exceptional growth in all aspects of its business. The company continues to drive solid results in most of the essential technology transitions such as mobility, data center, cloud virtualization and video. The company continues to lead the market with emerging technologies. Cisco continues to invest in the market transitions, which can make it more profitable.
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Over the year, Cisco's stock has surged with few shortfalls. Its stock currently trades at 12.4 times earnings. With a forward P/E of 10.23, its price can appreciate further. In addition, the company has been generating record earnings to back this surge. In this article, I look at its dividend profile, financial position and other financial metrics to examine the projected returns.
Dividend
In 2011, Cisco announced its first ever dividend of $0.06 cents per share. Since then, it has been able to increase its dividends by 133% in last two years alone. Cisco had shown one of the biggest hikes in dividends of 75% when it increased its dividend from $0.08 to $0.14 per share. Recently, the company announced a quarterly dividend of $0.14 cents per share. The company has been sustaining similar dividends for the last two quarters. The company dividends are extremely strong, and Cisco is in a solid financial position. Let's dig deeper into its financials to examine potential returns in the form of dividends, price and share repurchase program.
Financial Situation
At present, Cisco is switching more toward cloud computing and software. Over the years, Cisco has spent nearly $6 billion in software-related companies to increase growth and profitability. The company's business strategy is working as Cisco reported record revenue for the successive eight quarters in a challenging economic environment.
Q2 FY2012 | Q1 FY2013 | Q2 FY2013 | |
Net Sales | $11,527 | $11876 | $12,098 |
Year/Year Growth | 11% | 6% | 5% |
Gross Margin | 61.3% | 61.0% | 60.7% |
Operating Expenses | $4311 | $4588 | $4554 |
Operating Income | 23.7% | 22.3% | 23.1% |
Net Income | $2182 | $2092 | $3143 |
Source; 10Q form
Recently, the company announced Q2 results with record revenues for the eighth quarter in a row. As shown in the above table, Cisco has been able to grow revenues at an incredible pace. At the end of Q2, Cisco had generated record revenues of $12,098 million, reflecting year-over-year growth of 5%.
Along with record revenues, the company has been able to generate record EPS. At the end of Q2, the firm had generated EPS of 51 cents, which beat all analysts' expectation of 48 cents. This is a healthy sign for the company. Above all, the net income represents 25% of sales, signifying a low-cost business model. Digging into the company's balance sheet can reveal more facts about its financial heath and future returns.
With the year-over-year increase in sales and considerable profits, Cisco's balance sheet seems in a good position to create values for shareholders. A few key metrics in the table below reveal this trend.
Liquidity/Financial Health | 2011 | 2012 | Latest Qtr |
Current Ratio | 3.27 | 3.49 | 3.38 |
Quick Ratio | 2.99 | 3.20 | 3.05 |
Debt/Equity | 0.34 | 0.32 | 0.29 |
Financial Leverage | 1.84 | 1.79 | 1.74 |
Source: Morninigstar.com
At the end of Q2, Cisco's current ratio stands at 3.38. Current ratio is a valuable metric to determine the company's ability to meet current obligations. At present, Cisco has an enormous amount of cash and cash equivalent in its balance sheet, representing 53.09% of its total assets. On the other hand, current liabilities account for only 18% of stockholders' equity. Thus, the current ratio of 3.38 indicates substantial cash resources to meet short-term obligations. In addition, its high quick ratio and low debt-to-equity ratio sketches out a strong financial health for the company. Digging into cash flows can reveal more facts about its cash position.
Figures in Million | 2011 | 2012 | TTM |
Operating Cash Flow | $10,079 | $11,491 | $11,871 |
Capital Expenditure | ($1,174) | ($1,126) | ($1,129) |
Free Cash Flows | $8,905 | $10,365 | $10,742 |
Source; Morningsatr.com
Cisco has been showing extremely strong cash flows. Over the past two years, Cisco has been able to grow operating cash flows from $10 billion to $12 billion in the Trailing Twelve Months [TTM]. Additionally, in TTM, it has generated $11 billion in free cash flows, and paid $2 billion in cash dividends, representing a significant potential to raise dividends. Furthermore, the company's payout ratio based on dividends stands at 25%. The low payout ratio suggests that Cisco has a lot of room to increase its dividends.
Peer Analysis
CSCO | JNPR | ALU | FFIV | |
P/E | 12.4 | 58.8 | -1.2 | 26.6 |
P/B | 2.1 | 1.5 | 1.3 | 5.3 |
P/S | 2.5 | 2.5 | 0.2 | 5.2 |
EPS Growth | 12.40% | -5.30% | 0.00% | 44.60% |
Morningstar.com
Cisco Systems' main industry peers are F5 Networks, Inc. (FFIV), Juniper Networks, Inc (JNPR) and Alcatel-Lucent ADR (ALU). Currently, Cisco is trading at attractive multiples compared with its peer group. At present, the stock is trading at a discount; its stock currently trades at 12.4 times earnings. In addition, it has high EPS growth compared with its peers.
In conclusion
Cisco has shown a strong business strategy, which enabled it to achieve massive results. Cisco has been generating record revenues and earnings year over year. It has a strong balance sheet with an incredibly high current ratio. At present, the company has a substantial amount of cash reserves to support both dividends and acquisitions.
In addition, as another representation of its solid cash position, the company is currently working on a shares repurchase program. I believe the company has a significant potential to raise dividends with such strong cash flows and a solid balance sheet. Its solid financial position, and continued potential to post record profits will further appreciate its price of the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
