Cisco Systems, Inc.'s (CSCO) particular inclination towards dividends seems to have gone viral over the past few weeks. Last week, it came to light that the tech heavyweight was increasing its dividends by 75 percent, a move that gives a yield of close to 3.2 percent and places the company in the highly coveted top 30 tech category.
While this news stirs a profound bullish vibe, attention should not be placed on all the positive remarks, but on the new possibilities that arise from Cisco's dividend increase. I believe that the increase in dividends exhibits Cisco's unrivaled ability to maintain a healthy balance between value and growth.
In typical instances, maintaining a healthy balance between these two crucial lineaments is more than an uphill task. Why is this so? Creating value extends the need to always maintain a smile on the faces of shareholders. Keeping shareholders happy in most cases involves increasing dividends and limiting the amount of profit that can be reinvested into business. As such, happier shareholders and increased stock value inevitably limits growth prospects.
Moody's positive outlook
How am I certain that Cisco's growth prospects are still relevant? Moody's Investors Service on Monday gave an interesting insight into Cisco's 75 percent dividend increase. Moody's highlighted that the increased dividends would have no detrimental effects on Cisco's credit rating, citing that Cisco had the financial flexibility to increase dividends without hurting credit ratings.
With this in mind, a picture of Cisco sitting on a pile of cash is hard to dispel. Even with the increase in dividends, the payout ratio still suggests that Cisco has the muscle to continuously raise its dividend in the future. This characteristic, coupled with Moody's positive remark on financial flexibility, suggests that Cisco can still direct its attention towards growth, despite its inclination towards value and dividend hikes.
In my line of thought, Cisco couldn't have played it any better. I am impressed by the tact and strategy. The dividend hike greatly improves its stock's attractiveness and may widen Cisco's investor base. To add to the sparkle, Cisco has pulled this incredible feat without straining any of its growth prospects.
I can confidently say that Cisco's future is headed out on a positive stretch. It will be able to attract a lot of investors along the way and the company has enough cash to pick viable projects in the long haul.
The grass on the other side is not always green
Moving over to close competitors like Alcatel-Lucent (ALU), you will note that the grass is not as green. The prospects are low as the once formidable tech player is currently wedged between a rock and a hard place. Alcatel is sweeping through disappointing earnings. Not only did Alcatel's revenue dip 7.2 percent year-over-year in the second quarter, but its performance in its distinctive business segments also declined.
This discouraging performance, coupled with the fact that bigwig telecom players like AT&T Inc. (T) and Verizon Communications (VZ) have cut back on capital expenditure, spells a lot of incertitude for Alcatel. To paint a darker shade of gloom: Europe - which is Alcatel's home market - is still neck deep in economic troubles. I believe that Alcatel's problems will draw out into the next financial year. Therefore, Cisco has leeway to advance - absent reasonable competition from Alcatel.
Hewlett-Packard Co. (HPQ), on the other hand, also has various issues to worry about. While its problems are not comparable to Alcatel's, it still has to struggle on its entry into the tablet market, amid a shrinking PC market. As of the moment, Hewlett Packard has heightened the tempo with regard to its forced entry into the tablet market. I believe that this move, if successful, will be followed by subsequent entry into the smartphone market. From a realistic point of view, I believe that Hewlett-Packard still has a long way to go in its efforts.
Juniper Networks Inc (JNPR) has assumed the role of silent competitor. It has eluded the headlines for quite some time and in my line of thought is looking for something big before making a comeback in media houses. It probably wants something big, so as to increase stock discussion and possibly lure some buyers.
With all this in mind, it becomes clearly evident that most of Cisco's close competitors extend no formidable threat. Cisco can operate in a relaxed environment and is currently swallowed in a bullish cloud. It is a strong buy and extends a great opportunity for both growth and dividend oriented investors.