Cisco Systems Inc. (NASDAQ:CSCO) stock has gone nowhere since its last disappointing earnings report in May, but in a rising market, hope springs eternal.
The shares have yet to recover from a dour forecast and light services revenue. But analysts are now pounding the table for a new concept, unified communications, where Cisco is expected to be one of the big winners.
Cisco Systems has been bringing in between $47-49 billion in revenue for several years now, bringing about one-fifth of that revenue to the net income line, and it had almost $54 billion in cash and short-term securities in the bank at the end of April. It has been using its cash to buy software companies like July Systems, leading to it being called a “safe bet” for technology investors.
Look to Yield
By safe bet, the analysts mean Cisco is becoming a yield stock. Its dividend of 33 cents per share yields 3.1% to current investors, but that dividend has nearly doubled over the last five years. The value of the shares has also doubled in that time, meaning those who got in back then are getting a 6% yield and have a fat capital gain.
This is the genius of income investing. If a company can afford its dividend, if the dividend is rising, then the company doesn’t have to grow fast for investors to do very well. It costs Cisco Systems about $1.5 billion to pay out its current dividend each quarter, and it had $9.6 billion in net income for the quarter ending in April.
Cisco, in short, is a dividend monster.
When you invest in dividend stocks like Cisco, you don’t have to pay much attention to the daily or monthly fluctuations in the stock price. That’s what it means to be a safe bet. With technology continuing to rise in importance, Cisco’s plodding results still look good next to the rest of the market.
Cisco Systems Software Growth
Under CEO Chuck Robbins, Cisco is getting more software subscription revenue, which is more stable than the hardware sales revenue it previously depended upon.
July Systems is typical of this change. Its software connects to a store’s WiFi, identifies customers as they come in and brings up their history with the store, so salesmen have the same information the website has. The idea is that good customers can be greeted in a big store like friends, and security can keep its collective eye on the strangers.
The deal made sense for Cisco, because the software makes heavy use of a store’s communication systems and connects with back-office computers.
Whether this is replacement revenue or growth revenue will be revealed when the company next reports earnings on Aug. 15. Analysts are expecting 63 cents per share of earnings, about $2.9 billion, on revenues of $12.74 billion. Analysts will be focused on how it’s doing in security software, against aggressive competitors like Palo Alto Networks Inc. (NASDAQ:PANW), and in cloud-scale switching, where it faces Arista Networks Inc. (NASDAQ:ANET).
A partnership with Alphabet Inc.’s (NASDAQ:GOOGL) Google Cloud unit, signed last year, should also start bringing results in hybrid cloud software contracts linking corporate data centers to the cloud.
Bottom Line on CSCO Stock
Cisco Systems is going nowhere fast, but that’s fine with income investors.
A stock paying regular dividends doesn’t have to grow fast. It must simply evolve with the market. Cisco’s evolution into cloud network applications are designed to make it less dependent on hardware sales, and even more stable than it has been in the past.
Boring can be beautiful.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.