Cisco Is A High-Dividend Stock That's Still Undervalued

| About: Cisco Systems, (CSCO)

After getting bashed in the second quarter, shares of Cisco Systems (NASDAQ:CSCO) have done well this summer, gaining over 17% since the June lows. CSCO has also been one of the top four Dow 30 performers over the past trading month, gaining 6.90% and trailing only Home Depot (NYSE:HD), Caterpillar (NYSE:CAT), and IBM (NYSE:IBM), which leads the Dow pack with a gain of 8.49%. Even with its big summer gains, CSCO still trails the market year to date:

Thanks to a stronger fiscal fourth-quarter earnings report, in which adjusted EPS rose 18% vs. fiscal Q4 2011, CSCO's full-year 2012 EPS growth also looked good. In fact, one could argue that CSCO is still undervalued on a 2012 PEG basis. Looking forward, the consensus for 2013 calls for 10.81% EPS growth, which puts CSCO a bit over the 1.00 PEG threshold for being undervalued.

However, using the consensus future earnings growth rate of 8.09%, with a risk-adjusted 10.41% discount rate, shows CSCO's estimated value to be approximately $23.25. That indicates CSCO is currently undervalued by well over 20%.

Click to enlarge images.


After having joined the universe of dividend stocks in 2011, CSCO is now approaching the arena of high-dividend tech stocks. CSCO just ratcheted up its quarterly dividends big time by announcing a huge 75% increase, going to $0.14, from $0.08. This is the second increase in 2012 -- CSCO increased its dividend in the first quarter to $0.08 from its initial $0.06 payout. This new higher-dividend payout ups CSCO's dividend yield significantly to just below 3.00%, which is in the higher range for most tech stocks:

Options Outlook

If you're interested in pumping up CSCO's dividend yield even further, you can gain additional immediate income via selling covered calls. Since the $19.00 call strike price is only $0.13 above CSCO's midday $18.87 price, it appears that you would risk having your CSCO shares assigned/sold before you collect one or both of the $0.14 quarterly dividends before the January 2013 expiration.

However, your assigned compensation would be much more than the dividends anyway: $1.11 in call premium now, plus $0.13 in assigned price gain, for a net gain of $1.24, a 6.57% gain. If your shares were assigned near the October ex-dividend date, in less than two months, this would equal a 39%-plus annualized yield approximately. Conversely, if your shares are never assigned, the minimum yield you'd make would be a 17.57% annualized static yield.

You can see more info on over 30 other call trades in our Covered Calls Table:

Here's a look at where CSCO is at price-wise over the past 52 weeks. With a very strong relative strength of 72.39, you certainly can't say that CSCO is oversold:

Cash Secured Puts

Given CSCO's recent big rise, a cautious way to still profit would be to sell cash secured put options. This January 2013 put gives you a breakeven price of $17.52, in addition to offering an annualized yield of over 18%, over 5 times the dividend amount.

You can see more info on over 30 other put trades in our Covered Puts Table:


As CSCO is such a dominant player in its industry, industry comps are a bit dicey. However, these comps do include other large firms that compete with CSCO in certain areas, such as Juniper, (NYSE:JNPR), Alcatel-Lucent (ALU), and Hewlett Packard (NYSE:HPQ):

Disclosure: I am long CSCO shares and short CSCO puts at the time of this writing.

Disclaimer: This article is written for informational purposes only and isn't intended as investment advice.