Company Description: Cisco Systems, Inc. offers a complete line of routers and switching products that connect and manage communications among local and wide area computer networks employing a variety of protocols.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CSCO is trading at a discount to only 1.) above. The stock is trading at a 28.7% discount to its calculated fair value of $35.35. CSCO earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CSCO earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CSCO earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 2011 and has increased its dividend payments for 4 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
CSCO earned a Star in this section for its NPV MMA Diff. of the $10,275. This amount is in excess of the $3,100 target I look for in a stock that has increased dividends as long as CSCO has. If CSCO grows its dividend at 16.1% per year, it will take 1 year to equal an MMA yielding an estimated 20-year average rate of 3.08%. CSCO earned a check for the Key Metric 'Years to >MMA' since its 1 year is less than the 5 year target.
Memberships and Peers: CSCO is a member of the S&P 500. The company's peer group includes: Brocade Communications Systems, Inc. (NASDAQ:BRCD) with a 1.5% yield, Juniper Networks, Inc. (NYSE:JNPR) with a 0.0% yield, and Sonus Networks, Inc. (NASDAQ:SONS) with a 0.0% yield.
Conclusion: CSCO earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CSCO as a 5-Star Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $39.63 before CSCO's NPV MMA Differential decreased to the $3,100 minimum that I look for in a stock with 4 years of consecutive dividend increases. At that price the stock would yield 1.8%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $3,100 NPV MMA Differential, the calculated rate is 12.1%. This dividend growth rate is lower than the 16.1% used in this analysis, thus providing a margin of safety. CSCO has a risk rating of 2.00 which classifies it as a Medium risk stock.
CSCO competes in a highly competitive industry. As demand in emerging markets has declined sharply, CSCO has felt the pinch. However, the company has not stood still during this challenging time. It has become leaner and is now a more focused competitor. Scale advantages and significant customer switching costs provide CSCO competitive advantages in its core markets.
At the end of June 2014, CSCO was assigned an A1 rating by Moody's along with a stable outlook. The rating was based on the company's financial strength and its broad and innovative product line. The company maintains very strong liquidity, with $50.5 billion in cash and highly liquid short-term investments, up $3.4 billion during its fiscal third quarter. This represent approximately 49.5% of total assets.
This liquidity position provides the company with the ability to return value to its shareholders through regular share repurchases and dividends. I will continue to look for opportunities to add to my position when the stock is trading below my calculated fair value of $35.35, and as my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in CSCO (0.7% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.