Seeking Alpha
Long only, deep value, growth at reasonable price, portfolio strategy
Profile| Send Message|
( followers)  

Cisco (NASDAQ:CSCO) is a stock everyone loves to hate. Maybe people hate John Chambers. Maybe people hold Cisco and its investors responsible for the technology bubble and the subsequent burst. Granted, the company is no longer the bellwether it once was. It is in fact losing market share. But, are things so terribly bad with Cisco? Aren't there any positives? Let's find out by playing the devil's advocate in this article.

  • Cash: Cash is king, be it for individuals or companies. Cisco is one of the richest companies when it comes to cash on hand. It holds close to $50 billion in cash and equivalents. That represents more than 50% of its market cap. Granted, most of this $50 billion is abroad and is subject to taxes if and when the company decides to bring it home. But that is still an astounding figure. It's interesting to note that despite having a widely believed 'horrendous' time period, Cisco has managed to double its cash position since 2008 as shown in the chart below.

(click to enlarge)

(Source: YCharts.com)

  • Dividend and Dividend Growth: When a company builds a huge cash hoard, the next step invariably is paying a dividend. Apple (NASDAQ:AAPL) did the same earlier this year. Cisco started paying dividends in 2011 and has already increased its dividend from 6 cents a share to 14 cents a share. Obviously, no company can sustain this pace but the table below assumes an 8% to 10% average yearly increase. Though the earnings are slowing down, the relatively low payout ratio and the cash hoard should comfort investors.

(Cisco: click to enlarge)

To get a sense of how good Cisco's dividend growth returns (of course it is only an extrapolation) could turn out to be, please check out these two articles on fellow "old tech" companies Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT). Intel and Microsoft are used for comparison because a) All three companies are former bellwethers that are looked down these days and b) All three have been paying dividends for some time, with Cisco being the latest.

The first table below is Microsoft's expected dividend growth based on its recent history and the second table is Intel's. Cisco's table above compares very favorably with these two stocks, which are now getting some respect for their dividend prowess. Maybe it's time people start looking at Cisco as a dividend growth tech stock?

(Microsoft and Intel: click to enlarge)

  • Earnings Surprise: Again, it is surprising to note that Cisco has consistently beaten earnings estimates as shown below. Maybe the estimates were so watered down but still, a beat is a beat. More importantly, the company is still making profits. With Cisco's earnings report coming up on November 13th, if you want to play the earnings, recent history shows you are better off being a bull than a bear.

(click to enlarge)

(Source: Finance.yahoo.com)

  • Best of Breed: Cisco's top 5 direct competitors together make about 15% of Cisco's market cap. Competitors like Alcatel-Lucent (NYSE:ALU) have been having their own nightmares. The table below lists only the networking and communication devices companies. Cisco's bigger size gives it much more room for R&Ds. It still has greater than 50% market share in Switching, Routing and Wireless. Those three sections form a bulk of Cisco's revenues.

(click to enlarge)

(Source: Finance.yahoo.com)

  • Price Targets and Forward Estimates: Trefis.com has a price target of $26.48 for Cisco. That is a good 50% from the current stock price. Yahoo Finance has a mean target of $21.79 according to 36 analysts. Granted, these price targets and ratings are sometimes way off but the forward estimates have been going up as well.

(click to enlarge)

(Source: Finance.yahoo.com)

Conclusion: While it is very easy to be bearish on the old economy companies and quite a few of them are value traps, Cisco will motor along providing slow and stable returns to investors, mainly through dividends. It is every investor's dream to have an entire portfolio of growth stocks like Apple or dividend stocks like Altria (NYSE:MO). However, as a portfolio expands, it is critical to diversify into more sectors/industries and perhaps into the 2nd and 3rd best players in each sector. As of now, we believe Cisco is perhaps the 3rd best high yielding technology stock behind Intel and Microsoft. (Sshh, Apple is still a great growth stock).

Source: Cisco's Plight: Are There Any Positives?