Cisco: Earn 8% Shareholder Yield From This Top Tech Stock

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Includes: CSCO
by: Small-Cap Detective

Summary

Cisco shares now sport a total shareholder yield of 8%.

Cisco is the ultimate ‘picks and shovels’ play on the coming Internet of Things boom.

A tax holiday on foreign cash holdings could be a major one-time catalyst.

The Dow Jones Industrial Average soared to a new all-time high last week, finally breaking through the 20,000 point barrier.

That was something to cheer about, anyway.

The bad news? There were some stragglers on the way to Dow 20,000.

Case in point: Cisco Systems, Inc. (NASDAQ:CSCO)

Cisco stock has been dead money for the past decade. On November 2, 2007, shares closed the trading session at $31.00 a piece. On January 29, 2017, they finally crossed that barrier again.

Why such dismal returns? Telecom and network hardware are no longer sexy businesses. Sure, these industries were cash cows during the 90's tech boom. Investors, however, have since moved on to new technologies.

So, is it time to pack it in on Cisco? Hardly. This tech giant is quickly becoming one of my favorite dividend stocks and the company has a number of catalysts that could lift shares over the next decade. Let me explain.

1 Dividend Stock for 2025… and Beyond

There are 69 billion reasons to love Cisco… but unfortunately almost all of them are abroad.

Right now, the company is sitting on over $69.4 billion in cash. The problem is nearly 90% of this money is trapped overseas. If management were to bring this cash stateside, the company must pay a 35% tax to the IRS.

The White House, however, could change this overnight. President Donald Trump promised a tax holiday on the campaign trail, whereby corporations would only have to pay a 10% levy on repatriated dollars. And judging by his rash of executive orders last week, he plans to stick to his election race promises.

Any tax holiday would be an immediate, one-time catalyst for Cisco shares. Based on current tax rates, investors value the company's overseas cash holdings at $39.4 billion. If Trump's tax policies are approved, this cash pile would be worth $54.5 billion.

You only need to do some napkin math to see how important this change could be. The difference between these two numbers is about $15.1 billion. Based on Cisco's current market capitalization, Trump could add up to 10% to the stock price overnight.

Secondly, Cisco has become the No. 1 "picks and shovels" play in the coming Internet of Things (IOT).

The idea of owning "picks and shovels" simply means owning companies that supply the vital tools and services many participants in a boom must use. This can be far safer than buying the individual players. And as we saw during the California Gold Rush and other commodity booms, suppliers, not necessarily miners, often end up making the most money.

The IoT could be the next tech goldrush. By 2020, cloud traffic is projected to quadruple. In 2015, there were 4.9 billion machine-to-machine devices. By 2020, this number is projected to hit 12.2 billion.

Corporations are going to need help sifting through this mountain of data, which is where Cisco comes into play. Last year, the company purchased Jasper Technologies in a $1.4 billion deal. The firm's SaaS-based platform allows users to analyze data, track performance, and gain insights from a growing number of IoT devices.

Analysts are throwing around numbers like "trillions" to describe the size of this new market. If Cisco can capture even a fraction of this opportunity, it would have a material impact on their bottom line. We're looking at a secular trend that could drive dividend hikes and capital gains for a decade or longer.

Finally, you're going to be well-paid to wait.

Over the past few years, management has been in the habit of hiking the dividend 15% to 25% at the start of each year. Assuming the company hikes its payout another 20% next month, the yield on Cisco shares will approach 4.0%. In combination with its standard buyback program, the total shareholder yield on Cisco stock is approaching 8%.

A tax holiday would trigger a cash bonanza for investors. If Cisco could repatriate its full overseas holdings, it could launch the largest share buyback program in history. Based on the proposed tax rates, management could repurchase over a third of outstanding shares… or payout a one-time 34% special dividend.

Of course, this thesis isn't bulletproof.

President Trump hasn't discussed much in the way of tax policy lately. If a tax holiday doesn't materialize, it could be a big disappointment for shareholders.

I'm not too worried though. Regardless of your political views, Trump has saddled his cabinet with many pro-business advisors. Despite his campaign promises, there's no doubt in my mind he's a friend of big business.

The Bottom Line on Cisco

Even if Trump doesn't make good on his word, Cisco is still a heck of a business to own. We're talking about a wonderful, wide-moat company that generates tons of cash. With a shareholder yield approaching 8%, you'll beat the pants off the market just by collecting dividend checks. This is definitely a top income stock for the next 10 years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

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