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Value Alert: Cisco Stock Is on an Undervaluation Trip (CSCO)

Yes, IT networking and computing is a boring industry, but this boring stuff is a big part of the beautiful end products we see on screens. And Cisco Systems, Inc. (CSCO) is at the forefront.

Value Alert: Cisco Stock Is on an Undervaluation Trip (CSCO)Since computing is still growing, leading companies in this space have some kind of value allure to them. Cisco stock takes a leading potion in this space.

Its latest financial figures further show why: Cisco reported impressive financial figures for its second fiscal quarter after the close of market on Feb. 10, pushing the stock higher.

Revenue came in at $11.9 billion, just above analysts’ expectation of $11.75 billion. Earnings clocked in at 57 cents a share, 4 cents better than earnings from the prior-year quarter. Analysts were expecting 54 cents a share.

Looking forward, Cisco expects 1% to 4% year-over-year revenue growth for its fiscal third quarter and non-GAAP EPS between 54 cents and 56 cents.

Cisco Stock Is Unappreciated by the Market

Despite all the figures in the report, trends in the company’s dividend payout history say the market isn’t appreciating CSCO stock enough

Coming with the impressive quarterly report was an announcement of an increase in the dividend that Cisco stock will pay for this quarter — 26 cents a share, up from the 21 cents paid for the most recent quarter.

This increase is a message of confidence from the board at Cisco that the company is healthy and that it foresees the good health of Cisco stock to continue. After all, a company doesn’t increase its dividend when it’s struggling to grow. And the data we have at our disposal says something similar, too.

Since it began paying dividends in 2011, this is the sixth time Cisco increased its payout. By comparison, Microsoft (MSFT), although it pays higher dividend, has only increased dividend payout five times. And Microsoft is about twice as big as Cisco, at least in terms of revenue. If Cisco is paying and incrementally increasing that dividend, it’s because the company is growing.

Since it started paying that dividend, Cisco stock has seen its free cash flow increase from $9.25 billion to $12.61 billion, a $3.36 billion increase.

If there was any assumption that CSCO stock might have increased its dividend to play with stock price, the FCF growth nullifies that fear, as Cisco’s total dividends paid is just 33.9% of its FCF. By comparison, Microsoft total dividends paid is about 43.25% of its FCF.

There is another trend in the total dividends paid by Cisco stock that shows it is growing. For the first three years, the total dividends paid by Cisco stock increased by about $1 billion on average. However, this has slowed down significantly. Over the last two years, the total dividends paid have averaged about $385 million.

This means that Cisco stock is having to pay relatively lower dividends, even though it’s been raising its payout and the CSCO stock price has also relatively increased over the five-year period.

This is a sign of growth and sustainability.

With all of the above in mind, the fact Cisco stock trades at a price-to-FCF ratio of 10.1 compared to MSFT’s 16.6 and you can’t but see how Cisco is undervalued.

Moreover, Cisco’s FCF, P/E and P/S ratios have been on the decline over the past year — an undervaluation trend, if you ask me.

As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.

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