This Tech Giant is a Buy With Recent Dividend Increase

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

Cisco Systems (NASDAQ: CSCO) recently announced that it raised its quarterly dividend by 21.4% to $0.17 per share, or $0.68 per share on an annual basis. Even with the increase, the distribution still seems to be quite conservative.  Cisco earned $1.73 per share in the past year and the payout ratio was only 39.3%. Let’s take a closer look to see whether or not investors should buy Cisco after the recent dividend increase. 

Business overview

Cisco, incorporated in 1984, is considered the global leader in Internet Protocol (IP)-based networking and communications and IT products used to transport data, voice and video around the world.

The majority of its sales, $36.3 billion, or 78.9% of the total 2012 revenue, were generated from product sales while the service revenue contributed around $9.73 billion, accounting for 21.1% of the total revenue.

In terms of geography, Cisco generated most of its revenue, $26.5 billion, or 57.5% of total sales, from the Americas. The Europe, Middle East and Africa (EMEA) region ranked second with $12 billion, or 26.2% of total revenue. Cisco has quite a diverse customer base as no single customer accounted for 10% or more of its net sales.

A consistent-growth cash cow

What makes me interested in Cisco is the consistent growth in its business. Revenue increased from $18.9 billion in 2003 to $46 billion in 2012, while net income rose from $3.6 billion, or $0.50 EPS, to more than $8 billion, or $1.49 EPS during the same period.

Further, Cisco has been considered a cash cow with rising cash flow since 2003. Operating cash flow has risen from $5.2 billion to nearly $11.5 billion, whereas the free cash flow is also on the rise, increasing from $4.5 billion to $10.4 billion.

Cisco started to pay dividends at $0.12 per share in 2011. Its dividend rose by more than 130% to $0.28 per share in 2012. I personally think Cisco could pay out more dividends, as the 2012 payout ratio was only 18.8%. As the dividend increased to $0.17 per share, the payout ratio moved up to 39.3%.

On a strong balance sheet

In addition, Cisco has a strong and liquid balance sheet. As of January, it had $55.5 billion in total stockholders’ equity, $46.4 billion in cash and short-term investments and nearly $16.3 billion in long-term debt.

Like other big IT giants and true to its own strategy, Cisco has been growing via many acquisitions. Thus, Cisco's goodwill and intangible assets have ballooned to $24.9 billion. Despite the huge amount of goodwill and intangible assets, Cisco’s tangible book value is still positive at $30.6 billion.

The highest operating margin and decent dividend yield

In the core router market, Cisco and Juniper Networks (NYSE: JNPR) could be considered the two biggest global players, together accounting for around 80% of the total market share. However, Alcatel-Lucent (NYSE: ALU) has been finding its way into the core router market with its Extensible Routing System 7950 family of core routers, which is considered to be 66% more power efficient than other routers of its competitors.  

At $21 per share, Cisco is worth around $111.9 billion based on market capitalization. The market seems to value Cisco cheaply at only six-times EV/EBITDA. Compared to the other two peers, Cisco is the largest and the most profitable company. 

Shares of Alcatel-Lucent were recently hovering at around $1.30 per share, and the company carries a total market cap of $3 billion. Within its peer group, it has the cheapest valuation at nearly three-times EV/EBITDA.

Juniper Networks, which was recently trading at about $18 per share, has a total market cap of $9.2 billion. Juniper Networks has the highest valuation, at 12.7 times EV/EBITDA.

As mentioned above, Cisco is the most profitable company among the three, with the highest operating margin at 22.7%.

Operating margins at Juniper Networks and Alcatel-Lucent are 9.4% and less than 1%, respectively, with the latter exhibiting the lowest profitability. 

In terms of dividend payments, whereas both Alcatel-Lucent and Juniper Networks don’t make distributions, Cisco pays its shareholders a dividend yield of around 3.25%.

My Foolish take

With a global market leading position, decent dividend yield, consistently growing operating performance and strong balance sheet, Cisco is a stock for investors to hold in a long run. With a valuation of only six-times EV/EBITDA, I personally think the current price offers investors a good entry point into Cisco.

Anh HOANG has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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