- CSCO is a large capitalization information technology stock with a high yield attractive to income investors.
- Our relative valuation analysis indicates CSCO trades at a 35% discount on a forward earnings basis to both the S&P500 and information technology sector.
- CSCO’s strong balance sheet and stability make it ideal for income investors.
Cisco Systems (NASDAQ:CSCO) is a leading networking and communication devices company engaged in the design, manufacturing and sales of numerous internet and communications products and services.
Recent Share Activity
CSCO shares have performed well since the beginning of the year up 12.0%, albeit retrenching back to the mid 24 level since reaching 26 in mid-July. The shares are trading towards the upper quartile of their 52-week range of 20.22-20.68. The recent pullback has given CSCO a modestly higher dividend yield of 3.08%
Our valuation analysis looks at CSCO from a relative perspective, comparing CSCO's metrics to both the large cap S&P 500 index and the Industrial Sector.
On a dividend yield basis CSCO is substantially ahead of the overall market and industrial sector with a yield of 3.08% versus 1.98% for the S&P 500 and 1.63% for the information technology sector.
On a trailing earnings basis CSCO trades at a modest discount to both the S&P 500 earnings multiple with a PE ration of 16.67 versus 17.61 for the index. Similarly, CSCO trades at a trailing earnings discount to the information technology sector that has a PE of 18.19.
CSCO is highly attractive on a forward earnings basis trading at 35% discount to both the S&P 500 and Industrials sector. CSCO's forward PE is just 10.8 versus 16.5 for the S&P 500 and 17.0 for the information technology sector. However, CSCO's projected earnings growth rate is lower than the S&P 500 and Industrial Sector.
In analyzing the above we find it helpful to view the forward PEG ratio that measure the cost of future earnings growth. We note that CSCO's PEG ratio of 1.47 is right in line with both the S&P 500 and information technology sector with ratios of 1.4 and 1.32 respectively.
From a valuation perspective we find CSCO highly attractive given the discount to both the market and sector on a forward basis and attractive PEG ratio, particularly given the substantial premium yield on the stock
For income investors the emphasis is on the company's dividend yield, stability, and preservation of capital. CSCO has a history of paying and increasing dividends. CSCO maintains a strong balance sheet and ample ability to service debt with Debt to EBITDA ratio of 1.71. CSCO has ample capability to cover dividend payments that amount to just about half of their annual earnings. From a qualitative standpoint the company operates in a highly competitive yet stable industry.
Overall we recommend CSCO shares for income investors noting the shares have a highly attractive dividend yield, strong relative valuation, and are highly stable with little likelihood of a dividend reduction.