Cisco Systems, Inc.: Big Dividend Yield Adds to Potential for CSCO Stock

Cisco SystemsBig Upside for CSCO Stock?

Before Netscape’s historic 1995 initial public offering (IPO) and the soon-to-follow bursting of the dotcom bubble, Cisco Systems, Inc. (NASDAQ:CSCO) stock was already a Wall Street darling, having advanced more than 3,680% since its own IPO just five-and-a-half years earlier.

Now, I’m not about to suggest that this stalwart of the tech world is about to repeat that meteoric rise, but I do believe that Cisco stock is absolutely poised to outperform the market. Here, I’ll offer just three important reasons why I think that.

First, let’s look at earnings.

Cisco is set to announce earnings on August 17. The consensus view is that the company will report earnings per share (EPS) of $0.55 for 4Q2016 and $2.13 for the full fiscal year (which ended on July 31). (Source: “Cisco Earnings Date,” NASDAQ, last accessed August 2, 2016.) If they hit those numbers, which I expect they will, that means that CSCO stock is trading at just 14.55 times (X) its trailing earnings (based on its current share price of approximately $31.00).

Now, I’ll grant that the market is a bit frothy at better than 25X earnings right now. However, 14.55X is a very reasonable price-to-earnings (P/E) ratio in any market environment—especially in an old bull like we have today! Yet, Cisco isn’t trading at this bargain price because it isn’t growing.

The Real Scoop on CSCO Stock

According to Cisco’s 2015 annual report, earnings grew at a compound annual growth rate (CAGR) of 8.39% from 2011 to 2015. (Source: “Cisco Systems, Inc. 2015 Annual Report,” Cisco Systems, Inc., August 2, 2016.)

But understand that a 8.39% CAGR takes into account the company’s dismal 2014 performance when EPS were down nearly 20% from the year before. If the numbers come in as noted in the previous paragraph, Cisco’s 2016 growth will be a very respectable 21.7%. I am completely comfortable paying less than 15X earnings for that level of growth. So, revenue and earnings growth are the next things to look at, since that’s what should drive Cisco’s stock price higher going forward.

I believe that double-digit growth rates are in store for Cisco into the foreseeable future. While the harsh reality is that Cisco’s numbers have been weighed down by its huge switches business, there is a lot going on at the company that should accelerate revenue and earnings going forward. In just the last year, Cisco has acquired 12 separate companies with a focus on growing its cloud, security, collaboration, and next-generation network routing businesses. (Source: “CISCO SYSTEMS, INC. (Filer) CIK: 0000858877,” Securities and Exchange Commission, August 2, 2016.)

To me, new products in new, rapidly growing segments are reminiscent of the mid-1990s growth drivers that helped CSCO stock perform so well all those years ago. And I expect more acquisitions to come, given that Cisco has more than $63.5 billion in cash and short-term investments.

Finally, while we’re on the subject of cash, let’s consider the third reason I like Cisco stock right now: while investors wait for all of this to unfold, they get paid a juicy (in today’s fixed income world) 3.4% dividend yield.

Cisco’s huge war chest of cash and its solid balance sheet lead me to believe that the dividend is rock-solid.

I expect Cisco will continue to raise its dividend every year going forward—which is exactly what the company has done since it was initiated five years ago. I’d also like to point out that the dividend on Cisco stock has increased at a more than 34% CAGR! (Source: “Stock Info,” Cisco Systems, Inc., August 2, 2016.)

The Bottom Line on CSCO Stock

Take all of this into consideration and 12 months from now, Cisco shares could easily be trading at 18–20X earnings, which are now (conservatively) estimated to be just $2.23 per share. (Source: “Cisco Systems: (CSCO),” Zacks, August 2, 2016.) That puts CSCO stock at around $40.00–$45.00 per share.

The above three factors may explain the recent advance in CSCO stock. At the very least, they are definitely the reason why I am bullish on Cisco right now.