Cisco: A Solid Investment For 2012

Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When evaluating a company’s financial standings, how rapidly it turns cash outflows into cash inflows, can be as essential as to how much profit it is recording in the accounting heaven known as “earnings.” For a fundamental investor, dividends matter, and this depends on the positive cash flow statements. You must know whether the last lot of earnings brought money into the company or just costumed a cash gusher with an attractive headline.

 

This is important to know whether you are wealthy in reality or just by the books, so while picking a stock for the investment portfolio it is better to take positive cash flow as an indicator of a dividend hike with a close eye on earnings result.

 

This is one of the requisites an investor must check when looking for the market’s top stocks. Now, I will distinguish how it relates to Cisco Systems (NASDAQ: CSCO).

 

Dividend History:

Cisco Systems is new to dividend paying and still relies heavily on legacy contracts. Its sales squad, up till now, has had little to worry about from competitors such as Hewlett Packard in relation to market share.

 

Although quite alot of its service areas trail behind rivals, its entire position stays solid. It has a 10.76% quarterly revenue growth and is a consistent earner with a profit margin of 15.61%. It has an operating cash flow of just below $11 billion, while its dividend yield is 1.58%. The dividend payout ratio for the firm remains 18.59%. Its price to cash per share is $2.33 and price to free cash flow stays at $12.27 to trailing month.

 

Cisco’s current share price is around $20, which has been stable over the last year. The foremost cash dividends were paid by the company in March 2011. The payment made was $0.06 and had continued the same rate since then.

 

Past Dividend Assumptions:

As a fresh dividend paying firm, Cisco is not likely to boost dividends considerably in 2012. It was anticipated that the stock would maintain the $0.06 dividend with the chance of a two to three cent rise per share in the coming quarters. This is due to the solid fundamentals of steady earnings and its well recognized place in the field of information technology.

 

Cisco’s CEO, John T. Chambers has announced that the firm is well placed as compared to most of its rivals. However the question rises, is it worth it for the shareholders when dividends payout is considered. The company is a steady earner, with all the impressive financials discussed above.

 

The share value of the firm has remained almost flat with a slight variation in the previous year, as its 52-week price range is $13.30 - $20.49.

 

Dividend Hike, an Added Surprise:

Cisco announced on Wednesday that it intends to pay a quarterly dividend of $0.08 per common share, $0.02 higher in contrast with the prior quarter.

 

Joanna Makris, analyst at Mizuho Securities, called earnings of Cisco “a nice upside surprise.” She further commented that generally speaking, people anticipated a good quarter. This is maybe a little better than earlier anticipated and the dividend is an “added surprise.”

 

The board granted a rise to $0.08 a share for April payouts. Meanwhile, the company is enjoying a healthy financial position. I do not believe dividends will increase further for the fourth quarter, as it is a fresh dividend payer. Cisco has solid steady earnings and could provide shareholders with greater dividend payouts by the end of the year.

 

Earnings Quick-Look and Outlook:

Cisco, which is the largest manufacturer of networking equipment, surpassed profit and sales forecasts, easing worries that interruptions in network upgrades by phone and cable firms would drag down its sales.

 

The company stated yesterday in a statement that fiscal Q2 net income increased to $2.18 billion, or $0.40 per share, versus $1.52 billion, or $0.27, a year before. Not including certain items, earnings came in at $0.47 for the period closed January 28. Analysts in a Bloomberg poll had anticipated $0.43.

 

Cisco projected a Q3 revenue increase between 5% and 7%, which translates to almost $11.4 billion to $11.6 billion, against an average forecast of $11.5 billion. Not including some expenses, earnings will be in the range of $0.45 to $0.47 per share. Analysts had anticipated $0.45.

 

Cisco, a Good Buy:

 

Analysts had a mean recommendation of 2.3 on the stock with a gauge (Strong Buy) 1.0 - 5.0 (Sell). According to thirty eight brokers, median price target on the stock is $23 with the upper range of target at $27 a share.

 

The stock showed a positive weekly performance of 1.61% associated to its rate of return which for the month was 2.07%. Similarly the performance for a quarter continued to remain up with 12.76% and settled at 11.58% for a year, however year to date performance firmed at 12.26%.

 

The price moved ahead 1.20% from the mean of 20 days, 5.24% from 50 and went up 18.65% from 200 days average price. So based on these solid indicators, I put a “Buy” recommendation on the stock.

 

Joanna Makris, analyst at Mizuho Securities USA in New York, stated that almost a third of Cisco’s revenue comes from communications suppliers, making it less reliant on the industry than competitors. She also recommends buying the Cisco’s shares.

 

A fall in spending by phone and cable firms is taking a larger toll on Juniper (NYSE: JNPR), Cisco’s largest rival. Juniper CEO Kevin Johnson stated that telephone and Internet-service clients are postponing network upgrades, particularly in the US. Service providers account for greater than half of his firm’s sales.


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