Cisco Finally Joins the World in Reality
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is nice to see that Cisco (NASDAQ: CSCO) has finally seen the writing on the wall and acknowledged that it is no longer a Silicon Valley growth story. It has increased its dividend and are committed to giving cash to shareholders. This is all in the Q4 2012 earnings call.
The Warm Glow of the Dividend
It is great to see that Cisco has come to realize what we all realize, which is that its days of explosive growth are long gone. This allows them to refocus toward the future. Management has stated their intention to return 50% of free cash flow to shareholders via dividends or share buybacks. I do not like that share buybacks were mentioned. Overall, I am not a big fan of share buybacks, because rarely are companies as undervalued as management thinks they are. I think focusing on the dividend would have been enough.
The dividend makes Cisco a great choice for a stable, long-term portfolio. The stock still has some capital appreciation to undergo. I think Cisco can cross $30 in the next 1 year. That makes these prices a bargain. With the current dividend of $0.14 yielding about 3.2% you will be cashing checks while your investment increases in value. That seems like a great deal. I would like the yield to stay above 3%, and ideally reaching and keeping 5%. That might be a bit high, but 4% should be attainable. Note that the increase to $0.14 for the quarter is a 75% increase. Enough to make a Cisco owner jump into the air like Flash Gordon. As Cisco gets more comfortable paying out these dividends we should see some moderate increases. Paying out large dividends require being comfortable with a smaller cash position. It will take some time for Cisco to internalize the commitment to dividends.
That need to pay the dividends will keep Cisco focused into the future. No more ham-fisted forays into camcorders to try and make up for the loss of explosive growth in more mature segments. Now instead of Cisco trying to stay on the hottest trends, such as following Apple into consumer electronics, they can focus on their core business. If the core cannot organically grow at a fast clip then pay out the free cash. I like companies that focus on what they are good at.
I know I might draw heavy fire saying this, but showing fat percentage gains on revenue is not particularly important to me. Just outrun inflation by a bit, and return that cash to shareholders. Obviously, capital appreciation is great, but if I want fast movement I would use options. What I look for in something I hold for a while is some growth to counter inflation, price stability, and a check. I want the money in cash form, and I want the stock not to implode. That is extremely reasonable. Cisco has finally entered into this arena. This does not mean I do not want good growth, but I do not have a love affair with increasing revenues over 10% a year. I will look into things that will really drive Cisco in the coming years, because you cannot just keep using old products. In the technology space obsolescence is an ever deeper hole, just ask the blackberry makers.
What is the Competition Doing?
Cisco has tons of competitors, especially if you go market by market. The competitors for routers may not be the competitors for switching or for communications. I will just focus on the main ones, which in my mind are Juniper Networks (NYSE: JNPR), Alcatel-Lucent (NYSE: ALU), and Hewlett-Packard (NYSE: HPQ). These are three listed on Yahoo! Finance competitors list.
Juniper does not have a dividend, and I do not think they will have one any time soon. They are smaller and therefore the weakness in the router market will hurt them just like Cisco, but without benefit of being in many different markets. Juniper is exposed to slowdowns more because of its more narrow focus.
Alcatel-Lucent is on life support. I see some potential in Alcatel-Lucent, but it is not a stock for a stalwart buy and holder. It might require a buy and hold time frame, but it does not have the fire and forget stability that conservative investors prefer. This is strictly a high risk play. They are many years away from a dividend, and a dividend is not a priority right now. They are making a grab for market share in some of Cisco's markets
Hewlett-Packard as far as I can find competes with Cisco very narrowly in Ethernet switches. Hewlett-Packard is the one competitor on this list that has a dividend, and it is more substantial than Cisco. HPQ was going through some tough waters earlier, but seems to have arrived at calmer seas. Much of HPQ's business is not in competition with Cisco. If your research tells you that HPQ is good too, then just buy both. You get two dividends instead of one. The goal is not to find the one company to rule them all, just have a good portfolio that provides a nice rate of return. Capital gains can be capricious; dividends are much safer.
Conclusion
Cisco looks like a good buy. I think it is undervalued below $20, but even if it is fairly valued you can collect the dividend. Cisco fell out of growth territory long ago. Now Cisco will come to terms with its new position, and its dividend should be a great way to earn a return. This will be good for shareholders.
TheArchivist owns shares of Cisco Systems. The Motley Fool has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.
