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Sound investing requires a disciplined approach, such as the one "Team Alpha" has taken with a dividend growth investment strategy, sprinkled with an allocation of undervalued stocks with strong capital appreciation possibilities.

While seeking a steady and reliable stream of income, we cannot pass up an opportunity to achieve the "alpha" of both capital appreciation potential as well as an impressive new stream of income.

Cisco Systems (NASDAQ:CSCO) appears to fit that description.

We have already added Cisco to our core portfolio but it would be wise to delve into some of the important facts as to why this particular stock could be a dramatic performer for any portfolio.

Just for the sake of review, let's look at the "Team Alpha" portfolio:

Our portfolio now consists of Exxon Mobil (NYSE:XOM), Johnson & Johnson (NYSE:JNJ), AT&T (NYSE:T), General Electric (NYSE:GE), Annaly Capital (NYSE:NLY), Southern Company (NYSE:SO), Procter & Gamble (NYSE:PG), Intel (NASDAQ:INTC), Realty Income (NYSE:O), Coca-Cola (NYSE:KO), Bank of America (NYSE:BAC), American Capital Agency (NASDAQ:AGNC), Wal-Mart (NYSE:WMT), Cisco, 3M Company (NYSE:MMM), and Bristol-Myers Squibb (NYSE:BMY).

Here is our most recent "Team Alpha" article for your review.

As of right now, Cisco accounts for roughly 2% of the overall portfolio value. That will be changing within the next 3 days.

The Opportunity Of Cisco

With a dividend yield of over 3%, we can satisfy our main goal for retirement of income. Since Cisco has raised their dividend it has turned into a value stock for our portfolio. The large increase in the dividend is also supported by a miniscule 19% payout ratio.

The payout ratio alone should give a hint to investors that we could be looking at the next dividend winning stock to be able to not only pay dividends, but raise them every year for a very long time.

Cisco is also a cash cow. The company has nearly $50 billion in cash and only $16 billion in overall debt. A 3-1 cash to debt ratio places Cisco in an elite class of companies that have platinum balance sheets.

A 55% YOY earnings growth with a revenue YOY growth of just under 5% should tell investors that as a mature company Cisco knows how to make money on what they produce. Also intriguing is that they do continue to increase revenues, even if they have slowed. All mature companies face this, and the solid value stocks find a way to grow earnings in spite of slowing revenue growth. That being said, when a company can achieve both, investors just might find the elusive stock that can do both - produce revenue growth with dramatic earnings growth.

Cisco appears to be heading in that direction. Take a look at the following chart:

Revenues have grown, profits have grown, dividends have now appeared, and the share price has dropped. It is true that the share price is about 70% higher than it was 10 years ago, however it is nearly 50% lower than it was just about 2 years ago.

As any good investor will tell you, these fundamentals alone spell opportunity. Plus we get paid to wait for the capital appreciation to catch up to the value of the fundamentals and the balance sheet.

For a technology company, the price to book is less than 2x, and the forward P/E is under 9. Those are very strong numbers for growth indications. So what does Cisco have going for it?

The Cisco Business

The wide range of businesses that Cisco participates in is most easily viewed at their own web site and as noted briefly here from Yahoo Finance:

"Cisco Systems, Inc. designs, manufactures, and sells Internet protocol ((NYSE:IP)) based networking and other products related to the communications and information technology industries worldwide. It offers switching products, including fixed-configuration and modular switches, and storage products that provide connectivity to end users, workstations, IP phones, access points, and servers, as well as function as aggregators on local-area networks and wide-area networks; and routers that interconnects public and private IP networks for mobile, data, voice, and video applications."

From Apple (NASDAQ:AAPL) to Amazon (NASDAQ:AMZN) to Facebook (NASDAQ:FB) to IBM (NYSE:IBM), virtually every company with any sort of internet presence does business with Cisco. Not only that, but any business that uses the computer to further their own business no matter what it is uses a Cisco product somewhere along the line.

Suffice it to say that as the world goes, so goes Cisco. Adding to all of this is a new business just entered into. The automobile business.

As reported in this article, it appears that Cisco is seeking to become a growth company in an entirely new endeavor:

"Cisco wants to rewire your car.

The networking giant takes in $46 billion annually selling the switches and routers that connect computers on the internet, and even across home networks. But over the past decade, it has neglected a whole new network of computers that has grown increasingly complex. That would be the network under your hood.

That's starting to change. In February, Cisco started funding a new business unit whose mission is to work with car and parts makers and essentially re-imagine the way that onboard systems connect."

Cisco has plenty of money to do whatever they choose and this endeavor is intriguing. With auto sales rebounding, and manufacturers looking for ways to add value to their own products, Cisco could find the goldmine in this business.

They might be coming in a bit late, but so what? Auto computer systems are notorious for being "finicky." If Cisco can offer a better product at a good price then is it hard to believe they will have all of the major auto manufacturers' attention?

"We literally have reached out to every car company in the world," says Helder Antunes, managing director of Cisco's smart connected vehicles unit. "What we would really like to do is to help standardize on the underlying networking platform and then allow them to innovate on the top."

Expanding businesses is one way to grow and exiting underperforming businesses is one way to increase profitability. Cisco has been doing just that but not at the expense of a vital area, as noted in this article:

"Cisco may be leaving consumer video, tablet computing, application delivery networking and other underperforming businesses behind, but it's not giving up on WAN optimization, despite persistent rumors of the demise of its Wide Area Application Services (WAAS) business.

"Let's set the record straight: to paraphrase Mark Twain, rumors of WAAS' demise have been greatly exaggerated," wrote Mark Lohmeyer, vice president of marketing, Services Routing Technology Group, in a Friday post to Cisco's corporate Borderless Networks blog. "Cisco is fully committed to the WAAS business. We have made some changes in our go-to-market approach, but our engineering teams remain fully engaged and working against our long term roadmap to drive application awareness to the network."

So basically, what we have is this:

  • A growth company that realizes it has become a value company.
  • A mature company that can still grow exponentially.
  • A moderately price stock with a solid dividend yield.
  • A company that has over 70% of all outstanding shares held by institutions.
  • A company with plenty of cash and very little debt.
  • A very clean balance sheet.
  • An elite brand name company with superior management.

Can you think of any reason NOT to own shares in this company? We will be doubling our allocation in "Team Alpha" within the next few days.

Source: Retirement Strategy: A Focus On Cisco And Opportunity