By Paul Tracy
One of the biggest tech companies on the planet could pay an enormous dividend. Right now, this company holds more than $48 billion in cash on its books. To put this into perspective, that's enough money to pay every person in America $153.
Or look at this way: With a current share price of $17, this company has enough cash to pay investors a one-time dividend equal to a 55% yield.
I'll admit, it's highly unlikely this company would shell out all its cash for a special dividend. But it does help prove just how successful this company is. Yet most investors ignore this stock. It's not exciting enough for them. They'll dismiss it as another "boring" blue-chip with no potential for future growth.
That couldn't be further from the truth.
The stock I'm talking about is Cisco (NASDAQ:CSCO), one of the market's best-known stocks. It's a Dow component with a $90 billion market cap.
For most investors, the company's sheer size is a red flag because it's too big. They believe you need to go "where the action is" to make money in the stock market. They say they have to invest in small, unproven companies to make significant returns. To me, that's a huge mistake.
See, I've been actively investing for nearly two decades. And during this time, I've found that the best way to get wealthy in the stock market is by owning companies that dominate their markets, are essential to our way of life, and that continually reward their shareholders with cash dividends and share buybacks.
Cisco is a perfect example of one of these companies. With a 67% share of the market for specialized networking equipment, Cisco is by far the largest player in its industry. Chances are the computer you're reading this article on is connected to a Cisco router.
This market dominance gives Cisco a huge competitive advantage. It's what Warren Buffett would call a wide "economic moat." Any competitor that tries to compete with Cisco is going to find it difficult to grab market share thanks to Cisco's entrenched position.
Meanwhile, Cisco is literally giving billions of dollars back to shareholders. Since 2001, the company has bought back more than 3.6 billion shares of its own stock -- reducing the shares outstanding by more than 25%. And just last year, Cisco announced it would be paying investors a dividend. Right now, this dividend stands at $0.32 a quarter, for a current yield of 1.9%. But the company just increased its dividend 33% a few months ago. And with more than $48 billion in its cash on its books, Cisco has plenty of room for more dividend increases for years to come.
All of these moves are making each share of the stock more valuable, but the price hasn't followed suit. Right now the shares trade at $17. That's the same level they traded at back in late 2005. But take a look at how much more valuable each share of Cisco is compared to back then:
As you can see, Cisco's earnings per share have grown 78%, and the company has increased its cash by a staggering 720%. But despite a clear increase in the company's underlying value, the stock trades at the same price it did seven years ago.
This disconnect between Cisco's share price and its recent financial performance can't last forever. Eventually, the investing community will see just how valuable this company really is. And when they do, investors who buy today could make a lot of money.
How high do I think the stock could go in the coming year or two? Well, given Cisco's dominant market position and strong profitability, I think the stock should be trading at an enterprise value/operating cash flow ratio of at least 10. That would put the share price at about $33 -- or nearly 100% higher than today's levels.
Disclosure: Paul Tracy does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of CSCO in one or more of its "real money" portfolios.