Cisco's Large Wallet Gives It Amazing Opportunities For Growth

Jun. 5.13 | About: Cisco Systems, (CSCO)

Two day ago, Cisco Systems Inc. (NASDAQ:CSCO) announced its quarterly dividend, which remains at $0.17. A few weeks ago (on May 15), third-quarter earnings were released. Net income has increased by 300 million dollars, or 14.5%, compared with Q3 2012. Earnings per share were at $0.46, which is 15% higher than in the same quarter one year ago.

CSCO has consistently increased its revenue, beating its own sales records in nine out of the 10 previous years (sales were down by $3.4 billion in 2009, compared with 2008). Part of this growth in revenue is due to the fact CSCO regularly buys other companies. For a full list of CSCO's acquisitions, click here.

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CSCO can easily afford to buy other companies, as it has an extremely strong balance sheet, with no short-term debt and a mountain of cash that's quickly approaching 50 billion dollars. Long-term debt is at only $16 billion. CSCO has managed to grow its amount of cash by over 20 billion dollars between 2008 and 2012.

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When we look at CSCO's short-term financial stability, we find that current assets are much higher than current liabilities. At the end of FY2012, current assets were at $61.9 billion, while current liabilities were at only $17.7 billion.

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It's already clear from this graph above that CSCO has some amazing financial strength, but to illustrate this even further, I've compared CSCO's current ratio to two of its competitors: Hewlett-Packard Co. (NYSE:HPQ) and Juniper Networks Inc. (NYSE:JNPR). CSCO clearly beats both of these competitors.

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Analysts expect CSCO's earnings per share to reach $2.00 in 2013, and $2.10 in 2014. This gives it an incredibly low forward p/e ratio of 12.2 for 2013 and 11.6 for 2014. Between 2003 and 2012, CSCO has already grown its EPS by close to 200% (from $0.50 in 2003 to $1.49 in 2012). This is much higher than the growth in net income, which has only gone up by 125%.

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The reason EPS grows so much faster than net income is simple: CSCO spends enormous amounts of money to buy back its own shares. Between 2003 and 2012, it has reduced the number of outstanding shares from 7.2 billion to only 5.4 billion. This has returned a lot of money to shareholders. In 2011, CSCO paid its first dividend, further rewarding people for owning its stock. The $0.17 quarterly dividend will give CSCO a payout ratio of only 34% if analyst expectations for EPS are correct. The current dividend yield is at a very healthy 2.8%, which is a bit higher than HPQ's 2.4%. JNPR doesn't pay any dividends.


Cisco has shown it's able to increase its revenue and income by buying up its competitors. EPS increased at an even higher pace, thanks to the massive share buybacks. Its balance sheet, with tens of billions of dollars in cash, is stronger than its competitors'. The 2.8% dividend means investors will be richly rewarded even if the stock price stays flat.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.