Cisco Makes Itself A True Income Investment

| About: Cisco Systems, (CSCO)

Technology giant Cisco (NASDAQ:CSCO) reported better than expected results for its fiscal fourth quarter Wednesday afternoon. Revenue grew 4% year-over-year to $11.7 billion, which was slightly better than consensus expectations. Earnings, on a comparable non-GAAP basis, increased 18% to $0.47 per share, which was also better than the Street expected. However, what really excites us about Cisco is that the firm finally raised its quarterly dividend to a meaningful level-a yield in excess of 3% at current prices. Please see our previous article on Cisco here to find out why we were anticipating such a huge dividend raise. Management also expects solid strength in the first quarter of its 2013 fiscal year, where it expects 2-4% revenue growth and diluted non-GAAP earnings per share of $0.45-$0.47 (up 5-9% YoY).

Not surprisingly, the most weakness Cisco saw was out of Europe. Revenues in its Europe, Middle East and Africa segment fell 5% year-over-year, driven by weakness in central and southern Europe. However, revenues in the Americas segment grew 7% year-over-year, driven by strength in the United States. While US government spending, as well as government spending worldwide, has been weak and will continue to be weak, the US drove firm-wide order growth during the fourth quarter. CEO John Chambers noted that growth in the US accelerated, especially in the second half of the quarter, and he indicated the market looks strong going forward. Chambers provided some very interesting insights on its call:

"GET and our largest 29 enterprise accounts declined in double-digits in Q3 and increased in double-digits in Q4. Those are our global enterprise accounts again in the theater. While U.S. enterprise grew 1% in Q3, it grew 4% in Q4. U.S. commercial for Q3 was 6% and for Q4 it was 7%. As expected our U.S. Federal business declined in both quarters with minus 8% decline in Q3 and minus 11% decline in Q4."

Over the past two years, Cisco appears to have successfully reinvented its business strategy. Once focused on growing via acquisitions and diversification (think Flip Cameras), the firm is focusing on gaining market share in its core competencies and becoming more shareholder-friendly. The firm continues to generate huge amounts of revenue in its routers and switches business lines, but we're more excited about the company's potential to profit from the shift to cloud computing. Data center revenue grew 90% in the fourth quarter, and management is understandably excited about its market position going forward.

With its dominant lines of business, Cisco remains focused on returning at least 50% of free cash flow to shareholders. The firm repurchased over $4 billion in stock during its 2012 fiscal year and now provides investors with a reasonable income stream after the dividend hike. We continue to believe shares are undervalued at current prices and are a fantastic dividend growth opportunity. Due to the dividend increase, we may look to add shares to our Dividend Growth portfolio (please see links on our left sidebar for more information). We're getting excited about Cisco's prospects going forward and remain very encouraged by positive commentary on the United States.

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