- The increased dividend went ex-date on 01Apr14.
- The stock is experiencing a bullish reverse head and shoulders pattern.
- The stock is inexpensive based on next year's earnings.
"Due to the expensive growth fundamentals, bearish technicals, and deteriorating financials metrics I'm not going to pull the trigger on this particular name right now." Since the time the article was published, the stock did drop 1.02% to a low of $21.30 (I called $21.16 to act as support) but has since rebounded to a 7.05% gain versus the 2.33% gain the S&P 500 (NYSEARCA:SPY) posted. Unfortunately, I didn't plow some money into it. Cisco designs, manufactures and sells internet protocol-based networking and other products related to the communications and information technology industry and provides services associated with these products and their use.
On February 12, 2014, the company reported fiscal second quarter earnings of $0.47 per share, which beat the consensus of analysts' estimates by a penny. In the past year, the company's stock is down 1.35%, excluding dividends (up 0.84% including dividends), and is losing to the S&P 500, which has gained 19.96% 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 portfolio.
The company currently trades at a trailing 12-month P/E ratio of 15.29, which is fairly 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 10.98 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.1 per share and I'd consider the stock inexpensive until about $32. The 1-year PEG ratio (2.74), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 5.58%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.
EPS Next YR ($)
Target Price ($)
EPS next YR (%)
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 3.29% with a payout ratio of 50% of trailing 12-month earnings while sporting return on assets, equity and investment values of 8.2%, 14.2% and 13.2%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 3.29% yield of this company is good enough for me to take shelter in for the time being. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.
Payout TTM (%)
Here is a chart of Cisco indicating a reverse head and shoulders pattern, a bullish pattern. I am by no means a chartist, but a reverse head and shoulders as described by Investopedia has the following characteristics: 1) The price falls to a trough and then rises. 2) The price falls below the former trough and then rises again. 3) Finally, the price falls again, but not as far as the second trough." The site then goes on to say, "Once the final trough is made, the price heads upward toward the resistance found near the top of the previous troughs. Investors typically enter into a long position when the price rises above the resistance of the neckline. The first and third trough are considered shoulders, and the second peak forms the head."
From my experience of head and shoulders patterns, you figure out where the neckline is and measure half the distance to the top of the head to figure out how much further the stock is going to drop, but in this instance it would be the reverse. The stock must break the neckline with "umph" though, meaning on large volume. It looks as if Cisco has done that, broken the neckline with strong volume. So taking $23 as the neckline (shown on the chart) and $20 as the top of the head, half that distance is $21.50. Taking the difference between $23 and $21.50 we get $1.50. So now I would add $1.50 to $23 to get a target of $24.50 for the immediate future. If you're a chartist reading this, please chime in on the philosophy I'm using as this is just from my experiences.
This is a company that cares about its shareholders, giving us a luscious yield which has been increased for the past four years. Granted the company is playing catch up with cloud and all, I believe it is still a good pick. Fundamentally, it is inexpensive on next year's earnings but expensively valued on the earnings growth potential. Financially, the dividend has been increased for four years in a row and is well supported by earnings. Technically, it appears the stock can experience upward momentum right now if this reverse head and shoulders pattern holds true. Due to the high dividend yield, bullish technicals, and low valuation based on next year's earnings I will be pulling the trigger on this name right now.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!