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Summary

  • The bearish technicals may bring the stock price lower to give us a higher dividend yield.
  • The stock has been dramatically underperforming the overall market since the start of this bull run and may be attributed to stale management.
  • The stock is inexpensive on 2015 earnings estimates.

The last time I wrote about Cisco Systems, Inc. (NASDAQ:CSCO), I stated:

"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." Since the time the article was published, the stock did drop 0.65% versus the 0.4% drop the S&P 500 (NYSEARCA:SPY) posted. 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 up 10.98%, excluding dividends (up 14.02% including dividends), and is losing to the S&P 500, which has gained 18.89% 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.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 15.19, 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 10.89 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.11 per share and I'd consider the stock inexpensive until about $32. The 1-year PEG ratio (2.63), 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 5.77%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

02Oct13

23.24

12.49

10.32

2.25

34

1.60

7.80

03Nov13

22.57

12.13

9.97

2.26

34

1.63

7.45

03Dec13

21.26

11.55

10.13

2.10

32

2.03

5.69

04Jan14

21.98

11.95

10.56

2.08

31

2.25

5.31

03Feb14

21.55

11.71

10.34

2.08

31

2.16

5.41

03Mar14

21.57

14.28

10.27

2.10

32

2.58

5.53

03Apr14

23.09

15.29

10.98

2.10

32

2.74

5.58

03May14

22.94

15.19

10.89

2.11

32

2.63

5.77

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 3.31% 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 3.31% 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.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

02Oct13

2.93

37

10.3

17.8

13.2

03Nov13

3.01

37

10.3

17.8

13.2

03Dec13

3.20

37

10.2

17.2

13.2

04Jan14

3.09

37

10.0

17.2

13.2

03Feb14

3.16

37

10.0

17.2

13.2

03Mar14

3.52

50

8.2

14.2

13.2

03Apr14

3.29

50

8.2

14.2

13.2

03May14

3.31

50

8.2

14.2

13.2

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock in middle-ground territory with a current value of 52.46. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars decreasing in height, indicating bearish momentum. As for the stock price itself ($22.94), I'm looking at $23.73 to act as resistance and the 200-day simple moving average (currently $22.58) to act as support for a risk/reward ratio which plays out to be -1.57% to 3.44%.

Recent News

  1. Cisco partnered up with Jive to provide networking solutions. The deal is much bigger for Jive (NASDAQ:JIVE) as opposed to Cisco. Cisco will integrate the enterprise social networking platform with WebEx and Jabber then resell the combined offering directly and through its partner networks.

Conclusion

With all the different CEO changes taking place around corporate America recently one has to wonder what would happen to the stock of this company if Mr. Chambers steps down. We saw that Microsoft's (NASDAQ:MSFT) has been climbing since they said Mr. Ballmer was being replaced. One has to imagine that Cisco stock (which has been languishing the past few years) has to have a move higher. Chambers has done a nice job since taking the helm, but has underperformed the S&P500 from the start of this bull market. This is still a well run company, but management may be getting stale here. Fundamentally the company is indeed undervalued based on future earnings estimates but expensive based on next year's earnings growth potential. Financially, the dividend is large and secure. On a technical basis I believe the stock may be coming on a downtrend. Due to the bearish technicals, overall market weakness, and the company reporting earnings soon, I will not be pulling the trigger here right now. But the time to buy more shares will be coming soon.

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!

Source: Cisco Has A High Yield Which May Yield Even Higher