Don’t Bail on CSCO Stock?
Cisco Systems, Inc. (NASDAQ:CSCO) stock is hitting new 52-week highs and has returned 12% year-to-date. That’s an impressive feat, given the ratings downgrades from Goldman Sachs in June and Bank of America/Merrill Lynch in April. Both downgrades cited lower growth as a reason. Is this cause for concern for Cisco stock investors? I think not.
Cisco Systems is the leader in networking infrastructure. Developing and selling products that are essentially building the Internet, Cisco is the largest networking company in the world. Company management has taken the necessary steps to ensure future growth for Cisco and windfall returns for CSCO stock investors.
But there are more reasons why I’m bullish on Cisco stock…
Growth by Acquisition
Current revenue growth expectations are in the range of zero percent to three percent year-over-year. Those aren’t exactly growth numbers to get overly excited about. Cisco is a good example of a company experiencing growing pains, but management has not taken a back seat in dealing with this growth dilemma. Instead, management has adopted the mantra of “build, buy, and partner.”
Given its cash hoard of $60.0 billion, a growth-by-acquisition strategy is not only a reasonable strategy, but also an appropriate one. After all, cash currently produces very little in terms of returns on investment (ROI).
In the third quarter of 2016 (3Q16), Cisco completed the following five acquisitions:
- Jasper Technologies, Inc., a cloud-based “Internet of Things” (IOT) service software platform
- Acano Ltd., a provider of cloud-based video meeting rooms
- Synata, Inc., an enterprise cloud search engine
- Leaba Semiconductor, a designer and developer of semiconductor products
- CliQr Technologies, Inc., a cloud management platform
These five acquisitions can add substantially to the bottom line in the future as Cisco management integrates these fast-growing prospective companies into its business model. As well, let’s not overlook the fact that these were just the company’s 3Q16 acquisitions.
Even though Cisco’s current growth is slow, the prospects of future growth following the above acquisitions and more are compelling.
Technology companies paying dividends are a new phenomenon on Wall Street. Cisco Systems began paying dividends in 2011 and has increased its dividend year after year. Cisco has committed an allocation strategy of returning a minimum of 50% of free cash flow to shareholders annually.
Cisco Systems is currently sitting on a $60.0-billion cash pile and is generating $10.0 billion in free cash flow. CSCO stock is yielding 3.5%. The company’s current balance sheet and income statement ensures an investor will not be losing any sleep worrying about a potential dividend cut.
The current low-yield bond market environment places dividends in a very attractive light. U.S. government 10-year bonds currently yield 1.51%, so a 3.5% dividend on this stock pick is an attractive yield for an investor who is reaching for just that. As well, recall the preferential tax treatment of dividends over interest income, making this stock even more attractive in the current investing environment.
If the current low-rate trend continues and government yields keep dropping, CSCO stock will continue to be a solid income investment.
CSCO Stock Price Performance
Since bottoming in July 2011, CSCO stock has been trending higher—a strong trend defined by higher highs and higher lows.
From a longer-term perspective, the chart pattern is setting up a large cup and handle formation (see chart below). Currently, CSCO stock is attempting to break out above a level of resistance that has stood for approximately 8.5 years.
Chart courtesy of www.StockCharts.com
The price objective of this pattern is $46.00 and is based on extrapolating the depth of the cup above the horizontal resistance level sitting at $29.00. I am using a monthly chart, thus confirmation of the breakout could occur when CSCO stock closes above $29.00 per share for the month of July.
The Bottom Line on CSCO Stock
Following the downgrades from analysts at Goldman Sachs and Bank of America/Merrill Lynch, the share price of CSCO stock continued to push higher. If the market can shrug off negative news, I think it is prudent for investors to disregard those downgrades too. As an investment, Cisco Systems has a positive fundamental backdrop and is on the verge of an upside technical breakout that could send share prices surging higher.