Retirement planning demands that you find investments that can provide decent growth for the long-term. Often this involves targeting traditional businesses with strong moats that pay dividends. Those criteria haven’t always included technology, but holdings like Cisco Systems, Inc. (NASDAQ:CSCO) stock have made investors rethink the norm.
Cisco stock is one of those perfect opportunities that presents all those buy-and-hold qualities, but also provides products or services that are on the cutting edge.
The Growth of Cisco
CSCO, which has been around since the mid-1980s, has proven adept at dealing with disruptive changes in technologies — not just through research and development, but also aggressive mergers and acquisitions.
From the company’s inception, the focus has been on building powerful networks. According to Sequoia’s Don Valentine, who was an early investor:
“By the 1980s, we knew that the first personal computers needed, in some way, to be networked — although that word hadn’t been invented yet…That’s why I thought the opportunity was so fabulous at Cisco: Their product was able to route that packet at light speed to the right destination. Many people had products that were like a router but were not a router. And switches were common, but switches couldn’t do what Cisco’s product did.”
The networking business definitely turned into a gold mine for Cisco stock during the 1990s, when the Internet revolution took off. And while the bust in 2002-03 saw a falloff, Cisco came back as network-intensive services became more ubiquitous, such as with cloud computing and social networking led by fast-growing companies like Facebook Inc (NASDAQ:FB) and Salesforce.com, Inc. (NYSE:CRM).
But Cisco stock could be poised for even more growth. According to the company’s research, the amount of mobile traffic is forecast to surge by 8X from 2015 to 2020, representing a 53% compound annual growth rate. Some of the drivers include mega-trends like streaming video, artificial intelligence, virtual reality and the Internet of Things.
Cisco is more than just about the network, too. Keep in mind that the company has been fairly smart at leveraging this platform by moving into adjacent categories, such as collaboration ($4.4 billion in annual revenues), data center ($3.4 billion), wireless ($2.6 billion) and security ($2 billion).
Cisco Stock Is a Lesson in Control
Cisco is a disciplined organization that keeps costs manageable and is careful with capital allocations. CSCO recently announced a workforce reduction of 5,500 workers, or about 7% of the total. Revenue per employee for Cisco is a hefty $668,000, which is three times higher than for Hewlett Packard Enterprise Co (NYSE:HPE) and International Business Machines Corp. (NYSE:IBM).
No surprise, then, that Cisco stock is rock-solid financially.
Cash flows from operations in the past year came to $13.6 billion, up about $1 billion from the year before. Cisco also boasts a hefty $65.8 billion in the bank — enough resources to keep up with R&D and M&A, but also to support the generous Cisco dividend, which yields 3.3%.
Valuation is reasonable, too. CSCO stock trades at 15 times earnings. By comparison, Microsoft Corporation (NASDAQ:MSFT) is at 27X and Oracle Corporation (NYSE:ORCL) sports a multiple of 19X.
Yes, Cisco’s growth metrics have been sluggish, with revenues up just 3% for the past year. But the company has made substantial investments in markets like security and wireless, which should help perk things up. Plus, long-term, CSCO likely will get a lift from growth in the network.
All in all, Cisco stock really does have the kinds of factors that make for a core retirement holding: sustainable cash flows, a nice dividend and the potential for a bump on the top line.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also OptionExercise.com, which provides interactive tools and financial services for those who have employee stock options (pre- and post-IPO).Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
