Cisco Dividend Stock Analysis
Cisco Systems has been powering the internet since 1984 with its broad range of technologies. As their markets matured and growth slowed they started paying a dividend in 2011. And you know we like that here at Dividends Diversify.
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Cisco remains a dominant player in computer networking equipment. Their products are critical for network performance, stability and security. They supply customers with:
- Complementary networking products
Their goal is to sell software and services to supplement their hardware products. And software and services are on track to make up about half of total revenue by fiscal 2020.
CISCO DIVIDEND YIELD
Cisco pays an annual forward dividend of $1.32 per share. This is a 2.8% Cisco dividend yield at the recent price of $47 per share.
COMPOUND ANNUAL DIVIDEND GROWTH RATE
|1 Year||3 Years||5 Years||7 Years|
Since paying their first dividend in 2011, the Cisco dividend has grown very quickly. I love companies that not only show me the money but share it with me! And Cisco has been doing a great job of doing just that.
As the computer networking industry has slowed from it’s hot growth in the 1990’s and early 2000’s, Cisco’s revenue has held in a tight range around 48-49 billion dollars. Forecasts call for 4-5% revenue growth in fiscal 2019.
CISCO DIVIDEND, EARNINGS AND PAYOUT RATIO
Over the recent past, Cisco’s earnings have grown mainly from their buy back of shares in the stock market. Earnings in dollars have been fairly stable, but with fewer shares trading in the market the earnings per each share rises. Sometimes this is referred to as the “financial engineering” of earnings. Higher earnings per share are being generated through the buy back of shares rather than through actual dollar growth in profits.
Cisco is able to do this because they are highly profitable and generate large amounts of free cash flow. They use this free cash flow to buy back shares and pay dividends. These are typically good activities for us owners in the business. And I expect Cisco’s dividend to increase 6-8% annually in coming years. Share buybacks will likely continue as well. And support earnings per share growth.
Because of Cisco’s sizable free cash flow, the dividend appears secure. The dividend payout ratio based on either accounting based earnings or free cash flow is below 50%. A lower dividend payout ratio is generally better. It shows the company has ample room to raise the dividend in coming years. Or, withstand an earnings drop with out having to reduce the dividend.
Knowing a company’s credit rating is important. Furthermore, it can make a big difference between companies that struggle and those who hold there own during a recession. Finally, a corporation’s credit rating is similar to how your personal credit score works. Most noteworthy, higher ratings mean lower risk to those who lend the company money. Also higher ratings mean lenders will likely get their loans paid back.
Cisco has an A1 and AA- credit rating from Moody’s and S&P, respectively. This is an investment grade – low to very low credit risk rating. This is a very sound and solid rating.
VALUATION & CONCLUSION
Cisco’s stock price has roughly doubled since January of 2016. Assuming the company can achieve their 2019 earnings forecasts, the forward price to earnings ratio will remain at about 15 times. A lower price to earnings ratio typically represents a better value for the investor. And Cisco’s does not appear to be excessive.
SUMMARY & WRAP UP
Cisco operates in a mature segment of the technology market place limiting its growth. It is a very profitable business that generates large amounts of free cash flow. I like the current combination of dividend yield (about 3%) and potential annual dividend growth (6-8%). You might consider purchasing the stock at current levels if these factors also appeal to you.
As for me, Cisco represents a smaller sized position in my dividend stock portfolio. But I intend to hold for the long term.
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WHAT ARE YOUR THOUGHTS ON CISCO?
Do you own Cisco? What do you think about its prospects? Leave your thoughts and let us all know!
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