Cisco Systems, Inc. (NASDAQ:CSCO) is far from the most interesting technology stock out there. But lately, that’s probably a good thing for Cisco stock owners. Facebook, Inc. (NASDAQ:FB) is engulfed in a spiraling scandal. Short-sellers are taking aim at Twitter Inc (NYSE:TWTR) for similar data-sharing concerns. Tesla Inc (NASDAQ:TSLA) seemingly plummets almost every day lately. And now reports suggest that the Trump administration is taking aim at Amazon.com,Inc. (NASDAQ:AMZN) for hurting brick-and-mortar businesses and operating in an anti-competitive manner.
Against that backdrop, boring might just be beautiful. And that brings us to Cisco’s dominant routers and switches business. While Trump and the government may take aim at certain internet sites, the infrastructure that makes it all possible and keeps the data secure never goes out of style.
Cisco is clearly one of the last generation’s exciting tech stories. And, it seems, many investors have given the company little thought since the dot.com bubble flamed out. That’s not entirely without reason. Cisco still derives well over half of its revenues from data networking equipment after all these years.
Its core markets remain strong, and it’s using that cash flow to move into better growth plays. As we saw with the huge moves in Microsoft Corporation (NASDAQ:MSFT) and Intel Corporation (NASDAQ:INTC), so-called dead money value traps can suddenly surge back to life once investors spot growth potential.
Cisco Stock Has More Valuation Growth Ahead
Over its corporate history, Cisco has spent more than $70 billion on the acquisitions of more than 200 companies. That trend hasn’t stopped now. The company is going after a number of markets, including security, machine learning, and cloud solutions. Since 2015, the company has moved recurring revenue up from 26% to 33% of the overall revenue pie. While that may not sound like a lot, the hardware business is declining slowly (low single digits), so the company has plenty of time to execute the move to software and subscriptions.
Until recently, Cisco stock was consistently trading under a 15x price-earnings ratio. That’s consistent with the sort of company that Wall Street has lost interest in. The stock languishes and languishes, as investors see little reason to make a move. But Cisco’s story is changing. So far, the stock has moved from the low 30s to 41. That could just be the beginning.
Within a couple of years, Cisco should hit a crossover point where recurring revenues move ahead of hardware sales and one-time software licensing fees. Once Cisco gets there, and is viewed as a subscription-based company, the Street should pay a lot more for each dollar of its revenues. That alone would be a decent story. But when combined with the next point, things get exciting.
Cisco Stock Has Gigantic Buyback Coming
Cisco is a huge beneficiary of the recent tax reform bill. And as a result, the company is about to shower its shareholders in cash. Cisco previously had more than $60 billion tied up in offshore cash. That pent-up capital can finally be put to use for Cisco’s shareholders.
The company is already making big plans. It announced a dazzling $25 billion addition to its share buyback program. At today’s prices, that’d buy back about 12% of outstanding Cisco stock. Sure, detractors may claim the company is growing slowly. But when you can add more than 10% to your earnings per share in the near future simply by buying stock at an attractive valuation, the organic revenue growth concerns tend to dissipate.
On top of that, the company is boosting its dividend by 14% this year. Cisco stock was no slouch when it came to yield even previously. It has often yielded above 3%, making it one of the few tech companies to do so. Given the 14% dividend increase, the yield is back to 3% again, despite the run-up in the stock price.
On top of that, the company has said that it will raise the dividend at about the same rate as earnings growth going forward. This is where things get exciting. Keep in mind that the company plans to buy back more than 10% of the outstanding stock float relatively soon. That adds up to a double-digit earnings increase, and subsequent dividend hike of equal size. Throw in another earnings boost due to lower ongoing tax rates, and you can see how Cisco is shaping up to be a dividend dynamo going forward.
Goldman Agrees: Cisco Stock Looks Solid
Rod Hall of Goldman Sachs shares my sentiment. He made the following point: “We expect Cisco to deliver significant returns to shareholders from the recently enacted tax laws.” As a result, last week, he moved Cisco stock up to Goldman’s prestigious “conviction buy” list, and raised his price target up from $51 to $54. Needless to say, that represents some serious potential from today’s $41 share price.
Now to be sure, it won’t be a straight line from here to $54 per share. Tech stocks are experiencing their heaviest selling in years, and even a stodgier one like Cisco isn’t immune. In fact, shares have dipped close to 10% from their recent peak. But compared to the selling in more flashy names like Tesla and the FAANG stocks, Cisco is a safe haven.
The 3% dividend yield quite attractive. It will get more so as the company continues to raise the dividend payout at an accelerated rate. Additionally, with the stock market sliding, Cisco can start immediately putting that repatriated cash to work. The farther the stock slides, the more bang the buyback achieves. I don’t own any CSCO stock yet — but that is likely to change soon if shares dip any farther.
At the time of this writing, the author owned INTC and FB shares, and held none of the other aforementioned securities. You can reach him on Twitter at @irbezek.
