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Remember when I told you to wait on Cisco (CSCO) because I believed that it was coming in? Did you buy it when it did come in? Well, it has pulled back 8.85% since that time courtesy of an earnings report, which included an announcement of layoffs. Cisco designs, manufactures, and sells Internet protocol based networking and other products related to the communications and information technology industry and provide services associated with these products and their use. On August 14, 2013, the company reported fiscal fourth-quarter earnings of $0.52 per share, which beat the consensus of analysts' estimates by $0.01. In the past year the company stock is up 21.71% excluding dividends (up 23.93% including dividends), and is beating the S&P 500, which has gained 17.64% in the same time frame. With all this in mind I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying more shares of the company right now for the technology sector of my dividend growth portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 12.49, which is inexpensively priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 10.32 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.25 per share and I'd consider the stock inexpensive until about $34. The 1-year PEG ratio (1.6), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is fairly priced based on a 1-year EPS growth rate of 7.8%.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.93% with a payout ratio of 37% of trailing 12-month earnings (or 43% of free cash flow) while sporting return on assets, equity and investment values of 10.3%, 17.8% and 13.2%, respectively, which are all respectable values but nothing to go writing home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.93% yield of this company is good enough for me to take shelter in for the time being.

Technicals

(click to enlarge)

On a technical basis the first thing I look at is the relative strength index [RSI] chart at the top, which tells me if a stock is in the oversold or overbought territory. I see the stock near oversold territory with a value of 36.7 but with a downward projection, this tells me that there may be a little bit of downside to the stock. To confirm that I will look at the moving average convergence-divergence (MACD) chart next and see that the black line has crossed below the red line and that the divergence bars are increasing in height to the downside indicating there may be a bit of downside coming. As for the stock price itself ($23.24), I see $23.58 acting as resistance and $22.54 acting as support for a risk/reward ratio of about -3.01% and 1.46%.

Recent News

  1. The company had a launch event for its new NCS core router line, which will compete directly with the Juniper PTX series routers.
  2. CEO John Chambers went on CNBC's closing bell providing rhetoric to the effect of Europe is recovering, U.S. is growing, but that emerging markets are mixed.
  3. The company declared a $0.17 per share dividend with an ex-date of Oct. 1, 2013 and pay date of Oct. 23, 2013.
  4. The company has been started at "Underperform" by Credit Suisse.

Conclusion

According to a SEC filing CEO John Chambers will see his pay rise 80% to $21 million for 2013. He may deserve a raise after the stock's performance for the past year, but is it really worth 80%? The company is inexpensively valued based on future earnings. Financially, the dividend payout ratio is very low based on trailing 12-month earnings and free cash flow. I don't doubt management will be able to continue to increase the dividend going forward and at double-digit clips. Based on future earnings the dividend payout ratio goes down to around 30.2% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some downward pressure in the immediate future. The stock is inexpensive on valuation, has great dividend growth potential, and a low payout ratio. It's because of these reasons I will layer into a position here because I know I can get it at a cheaper price soon due to the technicals situation.

Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Cisco Is An Inexpensive Stock With A Low Payout Ratio