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Cisco Systems: One of the Better Dividends in Tech
Stock Analysis & Ideas

Cisco Systems: One of the Better Dividends in Tech

Cisco Systems Inc. (CSCO) designs and sells a wide range of technologies that power the Internet. The company integrates its platforms across networking, security, collaboration, applications, and the cloud, empowering businesses and individuals internationally.

Cisco’s platforms are designed to enable its clients to provide customers with a highly secure, intelligent platform for their digital businesses.

Cisco is a mature company in the tech sector. While its growth doesn’t match the more extraordinary levels some of its industry peers enjoy, Cisco’s reliable client base and robust cash flow generation comprise solid qualities. The company’s competitive advantage is illustrated in its hardware dominance. To put things into perspective, over 80% of the world’s internet traffic since 1981has been conducted through Cisco’s technology in some way.

In my view, Cisco’s shares offer an attractive dividend, while the company’s pivot towards growing through its subscription offerings is likely positioning the company well for the medium to long term. That said, due to the stock’s expanded valuation, I am neutral on Cisco.

Latest Results

Last month, Cisco reported Q1-2022 results, with revenue growing 8.1% to $12.9 billion. Adjusted net income came in at $3.5 billion, or $0.82 per share, versus adjusted net income of $3.2 billion, or $0.76 per share, in the comparable period last year.

The company’s Secure Agile Networks segment, previously known as Infrastructure, saw its revenues grow 10%. Further, Cisco’s End-to-End Security segment, previously known as Security, also grew by 4%. The company also achieved 46% growth in its Internet for the Future segment, while Optimized Application Experiences also grew by 18%. The only segment to see lower revenues was Hybrid Work, whose revenues slipped lower by 7%.

Much of Cisco’s growth was sourced from EMEA and Asia Pacific/Japan/China, which grew by 11% and 15%, respectively. Americas expanded by just 5%.

Management provided guidance for FY-2022 performance, forecasting revenue growth of 5% to 7% year-over-year. Adjusted EPS is expected to land between $3.38 to $3.45. This implies a 6.2% year-over-year growth at the midpoint.

Dividend & Valuation

Cisco has grown its dividend for 11 consecutive years (i.e., since initiating quarterly payments). Dividend growth is somewhat underwhelming, with the latest dividend hike at only 2.8%. That said, with a yield of 2.38%, Cisco offers one of the highest dividends in the tech sector.

Further, at the midpoint of management’s guidance, the payout ratio stands at a very comfortable ~43%, which should be able to support consistent dividend hikes going forward. With four $0.37 quarterly dividends already declared, it is more than likely that the upcoming Cisco dividend will be larger as well.

To boost its capital returns to shareholders, Cisco repurchased $1.6 billion worth of stock in the last quarter. The company also has $7.7 billion remaining on its share repurchase authorization, which equals 2.9% of its $262.7 B market cap.

While I appreciate Cisco’s strong capital returns and rock-solid cash flows, I am a bit wary regarding the stock’s valuation. The midpoint of management’s guidance implies a P/E of around 18. This is considerably higher than Cisco’s historical average. While the multiple may look attractive for a tech stock, don’t forget that Cisco’s growth hovers in the mid-single digits.

Wall Street’s Take

Turning to Wall Street, Cisco Systems has a Moderate Buy consensus rating, based on eight Buys and seven Holds assigned in the past three months.

At $64.82, the average CSCO price target implies 4.08% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >

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