by Tom Taulli | August 17, 2012 12:41 pm
It’s never easy for a growth company to make the transition to maturation. Just look at Cisco (NASDAQ:CSCO). It seems only now that the company has realized that its glory days are over.
Perhaps the most telling evidence was announcing it’s hiking its dividend by 75%. In fact, Cisco plans to devote at least half of its cash flows to dividends and share buybacks. On the news, the stock rose by 9.6% to $19.02 yesterday.
It all sounds great, but the fact remains that Cisco is still a laggard. While its core business for switches and routers is mission-critical, growth there is meager. To keep up its market share from rivals like Juniper Networks (NYSE:JNPR) and Hewlett-Packard (NYSE:HPQ), Cisco has had to get aggressive on its pricing.
Cisco has also taken a knife to its cost structure. Over the last year, it has eliminated 7,800 jobs, and it has disposed of various noncore businesses. All this helped Cisco post a decent quarterly report. Adjusted profits came to 47 cents a share, and revenues were up by 4.4% to $11.7 billion. The Street was looking for earnings of 46 cents and revenues of $11.6 billion. Then again, the expectations were fairly modest.
Cisco does have some promising segments, such as security. The problem is that the core switching/router business still accounts for a majority of revenues.
What’s more, another drag for Cisco is Europe, which accounts for about 20% of sales. Austerity there will keep spending restrained. This will also likely be the case in the U.S. as well. It seems inevitable that further cutbacks in the federal spending are on the way.
No doubt, Cisco will remain a strong cash flow machine, and the dividend will act as a nice support. But don’t expect much growth. Yesterday’s big move in the stock may represent much of the gains for the rest of the year.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
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