Cisco Systems, Inc.: Why CSCO is a Great Dividend Stock
CSCO Stock Business Lines
Cisco Systems, Inc. (NASDAQ: CSCO) is a leader in the design and manufacturing of networking and communications hardware for the information technology industry. CSCO stock has almost $50.0 billion in annual revenue and pays a solidly supported dividend of $1.04 per share, which equals an annual yield of 3.34%.
Cisco makes a wide range of products, including modular switches, rack servers, networking devices, wireless access points, video transmission software, and network routers that form the backbone of the Internet and the hardware for corporate intranets. The company makes high-end graphic and engineering workstations. It has an expanding business in all aspects of network security and cloud computing systems. This is an increasingly competitive business, and Cisco stock has strong positioning to be one of the winners in this sector.
The company has an agreement with Apple to seamlessly integrate “iOS 10” devices into Cisco-created networks. The agreement serves to expand Apple Inc.’s (NASDAQ:AAPL) presence in the enterprise space and gives Cisco an extra benefit to solidify its leading position in corporate networking systems. Cisco is entering into a collaboration with Salesforce.com, Inc. (NYSE:CRM) that joins Cisco’s communication systems with Salesforce’s productivity software in a cloud-based system that provides in-app voice and video communication for Salesforce’s clients. The Cisco-Salesforce product combination expands both companies reach into enterprise markets and provides additional strength to fight off strong competition from companies such as Oracle Corporation (NYSE:ORCL), Microsoft (NASDAQ:MSFT), and Dell Technologies. (Source: “A Cisco-Salesforce deal means collaboration will come to you,” PCWorld, September 22, 2016.)
Cisco Stock Has Strong Financials
Cisco Systems has $50 billion in annual revenue, as previously noted, and net income of $10.7 billion, both of which have been increasing at steady annual rates. The net income has been increasing faster than revenue due to CSCO stock’s focus on cost-cutting. The company plans on reducing its workforce by seven percent through attrition and corporate restructuring and intends to invest all of the savings in business segments that have the best potential for future growth. The CSCO stock dividend is protected by the $5.9 billion of cash the company had on hand at the end of the 2016 fiscal year.
The company has a stated commitment to return at least 50% of free cash flow to investors in the form of stock buybacks and dividends. In the 2016 fiscal year, stock buybacks and dividends equaled $8.7 billion, representing 70% of free cash flow. The company repurchased about 148 million shares of stock at a total value of $3.9 billion and still has an open authorization to buy back another $15.4 billion of Cisco stock. Since first authorizing buybacks, the company has repurchased 4.6 billion shares, worth $96.6 billion. (Source: “Cisco Reports Fourth Quarter and Fiscal Year 2016 Earnings,” Cisco Systems, Inc., August 17, 2016.)
The increase in net income, combined with the stock buybacks, accelerates the growth in net income per share, which allows for potential steady increases in the dividend. This combination of factors makes for an excellent income investment opportunity.
Growth Potential for CSCO Stock
Cisco’s stock experiences greater volatility than most non-technology stocks. Ignoring the short-term ups and downs of the market shows a steady four-year uptrend with a gain of almost 100%. The majority of analysts have “buy” recommendations on CSCO stock, with one-year gains ranging from five percent to 20%. These figures have not been updated to reflect the impact of the recently announced deal with Salesforce.
Final Thoughts on Cisco Stock
The 3.34% dividend yield on Cisco stock makes this a good income investment. Adding in the commitment to increase payouts to stockholders gives dividend investors an even better upside. Finally, if the analysts are even partially right about the future rise in stock price, Cisco stock could provide market beating total return for investors willing to ignore the short-term volatility of a technology stock.