Cisco: 9-Year High And Still A Buy

| About: Cisco Systems, (CSCO)
This article is now exclusive for PRO subscribers.

Summary

Cisco is near its 9-year intraday high, but still carries one of the highest dividend yields among Dow components.

With an earnings report due in mid-August, we wanted to evaluate Cisco and determine if now was the time for dividend investors to take some profits.

Our conclusion: Cisco’s combination of a high dividend, strong balance sheet, low valuation and understated outlook make it a strong play for dividend investors looking for value.

Analysis

Nine-Year High. Cisco (NASDAQ:CSCO) shares continue to show their strength, starting the week by surging to another 9-year closing high. Cisco shares have been buoyed by better-than-expected earnings and positive market reception of Cisco's strategy to focus on security, network architecture and integration - as well as its initiatives in the Cloud and Internet of Things.

Cisco is slated to report its fiscal 2016 fourth quarter earnings in mid-August. Analysts currently expect the company to report earnings of $0.60 per share, a penny better than the $0.59 cents it reported a year earlier. Cisco is forecasting revenue growth of as much as 3% but analysts expect slightly negative (-2%) revenue performance.

We thought given the nine year high, now was a good time to evaluate Cisco to see if current dividend investors should take some profits ahead of what could be mixed earnings results, or continue to hold/grow their positions in Cisco.

Dividend and Outlook

Despite its rise in 2016, Cisco carries a 3.39% dividend yield, making it one the highest yielding components of the Dow Jones Industrial Average. Cisco raised its quarterly dividend by 23.8% to $0.26 per share earlier this year so investors looking for a dividend raise should probably look ahead to 2017 for the next one - the last time it raised its dividend twice in one year was in 2012.

That being said, dividend investors should take note that Cisco's average dividend yield in 2016 is at its highest in the last five years. This is despite the fact that Cisco's shares are up by 89% in the trailing five years. As such, on the basis of dividend yield alone, now is a good time to buy the stock.

Investors need not worry that Cisco's dividend maybe unsustainable: Cisco has among the most robust financial strength metrics in the industry - to wit, it has $3.27 for each dollar of liability that is carries - and much of this in cash and marketable securities. In fact, at the end of Cisco's fiscal third quarter, it had a $63.5 Billion cash hoard - a hoard that was sustained by the $13.9 Billion it generated in operating cash flow in the twelve months to April 2016.

Meanwhile, despite the fact that Cisco has bought back nearly $96 billion worth of its shares since 2008 (that was supported, in part, by the issuance of new debt), the company's leverage ratio remains quite low at just $0.46 for every $1.00 of equity. This low level of debt, together with its huge trove of cash, enabled Cisco to report Net Interest Income of $236 million in the first 9 months of Fiscal 2016. While this sum is equivalent to just under 7% of the dividends it paid to investors during the period, it nonetheless drives home the point that Cisco's dividends are sustainable and that it has the capacity to continue raising its dividends if it wishes to do so.

Another positive for investors: Cisco's stock is cheap. On both a trailing (15.2 times) and forward basis (12.6 times), Cisco's Price-Earnings ratios are below those of both the Dow and S&P500. This is likewise the case when comparing Cisco to its peer group - its competitors are trading at an astounding 1,280 times their trailing earnings and 28 times their sales compared to Cisco's relatively meager 15 times earnings and 2 times sales.

Part of Cisco's low valuation can be traced to the fact that its stock has only risen by 50% since the end of 2010 - but another reason is a tepid forward outlook. As we mentioned earlier, analysts expect Cisco to report a small decline in its revenues during its fiscal fourth quarter. Meanwhile, they're also predicting that Cisco's revenues will grow by just 10.5% a year over the next five years - not a bad growth rate - but a third less than the 15% growth rate anticipated for its competitors.

To be sure, Cisco's traditional networking solutions have seen better days and are seeing a small amount of attrition. However, a closer look at Cisco's revenue breakdown shows some positive underlying results. In fact, the areas where Cisco has made investments and strategic acquisitions, such as collaboration (+10%), security (+11%) and video infrastructure solutions (+23%), showed double-digit growth in the nine months to April 2016. These should continue to yield dividends going forward, as will Cisco's investment in the Internet of Things, which itself will rely heavily on infrastructure built using Cisco's products and technology. In that regard, it's possible the market is underestimating Cisco's growth prospects.

Conclusion

All things considered, Cisco is a solid portfolio pick for dividend investors. As we've outlined, Cisco has a strong dividend track record, the capacity to continue paying this dividend - and even increase it - owing to its robust balance sheet, and a low valuation. On top of that, it's possible that the market is underselling Cisco's future outlook.

While investors may be tempted to wait for a market correction or another round of Brexit fears before buying the stock, we have to ask "why wait?" Now is as good a time as any to buy an undervalued stock with a high dividend yield.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CSCO over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.