Cisco's Awesome Dividend Opportunity Has Passed If You Didn't Buy In March

Jun. 3.14 | About: Cisco Systems, (CSCO)

Summary

The stock has traveled too high in too short of a time frame after its earnings announcement. This is a good problem to have if you bought in March.

The stock has expensive valuations on earnings growth potential.

The dividend is still a great 3%, but was much higher 2 months ago.

The last time I wrote about Cisco Systems, Inc. (NASDAQ:CSCO) I stated, "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." After writing the article, the stock increased 8.01% (but decreased as low as 0.96%) due to earnings versus the 2.33% gain 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 May 14, 2014, the company reported fiscal third-quarter earnings of $0.51 per share, which beat the consensus analysts' estimates by $0.03. In the past year, the company's stock is up 2.76%, excluding dividends (up 5.77% including dividends) and is losing to the S&P 500, which has gained 18.03% in the same time frame. Since initiating my position back on 21st May, 2013, I'm up 10.53%. 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 16.86, 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 11.51 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.15 per share, and I'd consider the stock inexpensive until about $32. The 1-year PEG ratio (3.07), 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 5.49%. Below is a comparison table of the fundamental metrics for the company 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

02Jun14

24.78

16.86

11.51

2.15

32

3.07

5.49

Click to enlarge

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 3.07% with a payout ratio of 52% of trailing 12-month earnings, while sporting return on assets, equity and investment values of 7.8%, 13.7% 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 3.07% 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

02Jun14

3.07

52

7.8

13.7

13.2

Click to enlarge

Technicals

Click to enlarge

Looking first at the relative strength index chart [RSI] at the top, I see the stock in overbought territory, with a current value of 68.62. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line, with the divergence bars decreasing in height, indicating bearish momentum. As for the stock price itself ($24.78), I'm looking at $25.56 to act as resistance and $23.99 to act as support for a risk/reward ratio, which plays out to be -3.19% to 3.15%.

Recent News

  1. The company just announced a 29% gain year-over-year in server segment sales. The increase in sales was good for a 170-basis point increase in overall server sales to 5.7%.
  2. Deutsche Bank just upgraded the stock. The bank upgraded the stock after the company's Cisco Live conference left the impression that there will be stronger-than-anticipated sales of new switching, routing, security, wireless and cloud IT solutions. The bank's new price target for the company is $30.
  3. Cisco's foray into the security business continues to increase. The company announced it is buying malware protection company ThreatGRID. The terms were not made public. The company is going to continue to count on acquisitions to put a stop to the share losses in the security segment of the business.

Conclusion

Cisco has been gaining back share in a lot of what it sells, and I pounded the table on it back in December for a very nice gain. Fundamentally, the company is inexpensively priced, based on next year's earnings estimate, but expensive on future growth potential. Financially, it has one of the best dividends that an investor can get their hands on, but financial efficiency ratios have deteriorated a bit. On a technical basis, the risk is about equal to the reward, and my gut-feeling is towards the downside for now. Due to the expensive valuation on growth potential, overbought technicals and the equal risk/reward ratio, I'm not going to be putting additional capital to work in the 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!

Disclosure: I am long CSCO, SPY. 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.