Cisco Systems - Investors Cheer As The Company Boosts Its Payout

| About: Cisco Systems, (CSCO)

Cisco Systems (CSCO) reported a decent set of fourth quarter results on Wednesday after close. Furthermore the company announced a 75% hike in its quarterly dividends. Shareholders were pleased and sent shares 4% higher in after hours trading.

Fourth Quarter Results

Cisco reported fourth quarter revenues of $11.7 billion, up 4.4% on the year. On average, analysts have been expecting the company to report $11.6 billion in revenues. The company reported GAAP net income of $1.9 billion, up 56% compared to last year. GAAP earnings per share came in at $0.36 per share, up 64% on the year. Non-GAAP earnings per share came in at $0.47, beating analysts consensus by 2 cents.

For the full year of 2012, the company reported a 7% increase in revenues to $46.1 billion. Net income came in at $8.0 billion, up 24% on the year. GAAP earnings per share rose 27% to $1.49.

The company purchased 108 million shares during the quarter, at an average price of $16.62. In total it spend $1.8 billion on share repurchases, with another $5.9 billion of repurchases being authorized. Furthermore, the company boosted its dividend by 75% to $0.14 per quarter, or roughly $3 billion per annum.

CEO and Chairman John Chambers commented on the results, "As a result of our strong performance, continued execution on our plan to deliver profitable growth, and commitment to shareholders, for the full fiscal year, we delivered revenue growth of 7% as well as record year in revenue and earnings per share. Our strategy - delivering intelligent networks and technology architectures, built on integrated products, services and software platforms, to fuel our customers' business - is proving the right long-term strategy for our success."


For the first quarter of its fiscal 2013, Cisco anticipates revenue growth of 4-6%. This includes the impact of the NDS acquisition, which will boost revenues by approximately 2%.

Gross margins are expected to come in between 61-62%. Cisco does not see near term improvement in Europe, as its customers see challenges for the longer term. Adjusted non-GAAP earnings per share are expected to come in between $0.45-$0.47 in the first quarter of its fiscal 2013. On average, analysts expected a first quarter earnings guidance of $0.46 per share. This compares to non-GAAP earnings per share of $0.47 in the fourth quarter of 2012.


Cisco ended its fourth quarter with $48.7 billion in cash and equivalents, up $300 million from the last quarter. The company operates with $16.3 billion in short and long term debt, for a net cash position of roughly $32.4 billion.

Factoring in the 4% jump in after hours trading, the market values Cisco at around $97 billion. This values the operating assets of the firm at $65 billion, if we exclude the net cash position. This values the firm at 1.4 times annual revenues and a mere 8 times earnings.

The company announced it would boost quarterly dividends by 75% to $0.14. This provides investors with an annual dividend yield of roughly 3.1%.

Investment Thesis

Factoring in the gains in after hours trading, shares of Cisco traded roughly flat so far in 2012. Shares rose to $21 in April of this year, but fell in May after the company issued a cautious guidance for the fourth quarter. Shares hit a low of $15 in July, but recovered in line with the market in recent weeks. After Wednesday's gains, shares trade around the $18 mark again.

Earlier this year, Cisco announced the $5 billion acquisition of privately held NDS Group. At the time, I argued that Cisco's massive cash balance is save and will not be squandered on expensive acquisitions.

During the quarter it repurchased roughly $1.8 billion of its own shares, while it boosted its quarterly dividend to $750 million. CFO Frank Calderoni commented, "Cisco has the financial strength and flexibility to effectively invest in our business, pursue strategic opportunities, such as acquisitions, as well as return a minimum of 50% of our free cash flow annually through dividends and share repurchases to our shareholders."

The latest moves highlight the increased discipline at Cisco. Besides more generous payouts to shareholders it also focused on improved operations. Recently, it cut 1,300 full time jobs, or 2% of the total workforce of the firm. Cisco remains focused on core areas which include routing and switching gear. In these areas it competes with Hewlett-Packard (HPQ) and Chinese Huawei, increasingly more on prices.

Shares of Cisco have lost roughly 45% over the past five years. Demand for data processing capabilities has increased rapidly over the past years, amidst increase demand driven by smartphones which stream video and music. On the other hand, more data applications go in the cloud, reducing demand for Cisco's products.

Despite the challenging growth within Cisco and the European continent, shareholders react favorably as the company boosts its payout to its shareholders.

Currently, the company holds $6 in cash per share. Wednesday's commitment to distribute part of its massive cash balances is a vote of confidence for the future, awarded by shareholders.

I am a long term holder of the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.