Cisco Systems, Inc. (NASDAQ:CSCO) has been a pain for many investors over the last few years, with CSCO stock roughly flat since spring of 2010 vs. approximately 80% gains for the rest of the stock market in the same period. The tech stock has made overtures about restructuring for years now, with thousands of Cisco layoffs an annual occurrence dating back to the summer of 2011.
But CSCO stock investors have reason to be optimistic as the company approaches its next earnings report in about a month. After all, CEO John Chambers showed a lot of swagger after Cisco earnings in February — and CSCO responded with a huge pop as a result.
Some investors still aren’t convinced, obviously, because Cisco stock has drifted steadily lower since that earnings boost and is now roughly flat on the year.
But I happen to like CSCO stock here because the tech giant has made some smart moves lately and is set for outperformance for the better part of the next 12 months.
Here are my five big reasons to buy Cisco stock now before earnings:
Earnings Pop Potential: CSCO stock posted strong earnings that beat Wall Street expectations handily on both revenue and profits in February. Specifically, Cisco posted EPS of 53 cents, up from 47 cents per share a year earlier and topping forecasts of 51 cents. Additionally, revenue rose to $11.94 billion, up 7% from $11.16 billion last year to top expectations of $11.8 billion. Those numbers are all great — but equally compelling was the jump from a closing price of $26.73 on Feb. 11 to $29.24 on Feb. 12 — more than 9%.
Right Focus, Right Time: Why should earnings should be strong again? Well first, corporate IT departments seem to be better off in 2015 than in previous years. But most importantly, cloud computing and security are in focus, and Cisco is well-positioned to take advantage of these trends. Cisco’s networking dominance has made it the clear market share leader in cloud infrastructure — the servers and technology that make the cloud possible — with 14% of total revenues in this category to top both Hewlett Packard Company (NYSE:HPQ) and International Business Machines Corp. (NYSE:IBM). As for security, Cisco continues to grow ambitiously in this category with efforts that include the well-timed acquisition of Sourcefire in 2013. Being on the right side of these important tech trends will help Cisco’s future earnings.
Restructuring Benefits: CSCO is more than cutting costs with layoffs; the tech company also has laid off staff at the vice president level and higher. This is not just part of a transition structurally and strategically, but also a much-needed purge after acquisitions and hiring have continued to bring in new talent. Keep in mind, Cisco has been paying out bonuses — reportedly 89% of incentive compensation last year — and aggressively hiring in growth areas that it believes in, such as cloud computing. The lower overall headcount coupled with a strategically aligned workforce will help in both the short and long term.
Fairly Valued: While many investors are worried by the market’s volatility and stretched valuations, Cisco has a forward price-to-earnings ratio that is just north of 12 right now. That’s quite attractive given that the S&P 500 is valued at 17.6 times forward earnings, and the Nasdaq-100 is at 19.2. If you’re worried about overpaying for a new investment, CSCO can give you some peace of mind with its relatively low P/E.
Dividend and Buybacks: You can’t talk about CSCO stock without acknowledging the dividend power. Since instituting its dividend in 2011, Cisco has increased its payout five times — from an initial 6-cent quarterly payout to its current 21 cents per share. That 250% increase in about four years would be impressive enough, but dividend distributions are still just 37% or so of projected 2015 earnings. That means payouts are not just sustainable, but likely to increase. Not bad considering the current dividend yield for Cisco is at 3%. Additionally, Cisco reported 5.16 billion shares outstanding last quarter, down from almost 5.33 billion a year ago — close to a 4% reduction in share count in the last 12 months. And with almost $54 billion in cash and investments on the books, there is plenty of dry powder to fuel future dividends and buybacks in any environment.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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