Cisco Systems (NASDAQ:CSCO) hasn’t been this hot since the turn of the century, when it was (briefly) the world’s most valuable company. Since the start of the year, the shares are up 22%, against an S&P 500 gain of 15%. This puts the market cap at $235 billion, just $9 billion short of Walt Disney (NYSE:DIS).
Despite this, the recently raised 35-cent-per-share dividend still delivers a 2.7% yield to current investors. Since the collapse of the dot-com bubble, Cisco stock has become a conservative dividend stock. The company began emphasizing its pay-out in 2012, doubling it from 6 cents to 14, and since then it has more than doubled. It also has a big stock buyback program.
Yet headlines are treating Cisco today as a speculative investment. What gives?
The Market Is Hot for 5G
It turns out a lot of investors are hot for 5G.
Cisco says 5G will also bring demand for WiFi 6, a new version of the venerable technology used for local networking. Demand will be driven by machines and devices talking to each other, not to you, in areas like managing store and warehouse inventory, monitoring factory machine wear, or just telling you when to call the refrigerator repairman before the milk spoils.
JPMorgan Chase (NYSE:JPM) says the company’s routers, switches and security products will also benefit from the new wireless technology, as machine traffic is routed onto the internet and requires network upgrades.
CSCO is due to report earnings Wednesday, and net income of 77 cents per share on sales of $12.9 billion is expected, with 79 cents per share hoped for. During the same quarter last year, net income was 56 cents.
As usual, a beat on earnings could send the stock up 5%-10%, and a miss of even a few pennies could cause it to drop by a similar amount. Our Bret Kenwell says it’s currently too rich to buy on a short-term bounce — he’d be a buyer at $48. Vince Martin has been impressed by the recent rally, caused by a solid beat for the January quarter, but Chris Tyler expects the stock to cool.
There are even analysts suggesting you play Cisco stock with options.
The Real Cisco
Personally, I don’t care about these short-term gyrations.
As a conservative investor approaching 65, I put some of my retirement money into Cisco stock for the dividend. Because I don’t need cash right now and think the stock price will rise over the next few years, I take my dividend in stock.
Assuming a modest 10% gain in the share price, and a corresponding hike in the dividend, over the next five years, I am expecting to see shares at about $80 and a dividend of about 50 cents in 2024, when the IRS says I need to start taking out my retirement money and kick back. (I believe writers retire to pine boxes, but a cruise would be nice.)
This is the difference between investing and speculating. Investors look for good long-term plays, put some money in them, and then walk away. Let time perform its magic.
The Bottom Line on Cisco Stock
Routers, wireless and security are all likely to grow throughout the 2020s, and Cisco is well-positioned in them. If it misses a trick, it has the financial strength to buy what it missed, as it has done six times just in the last year with companies like Singularity Networks, Luxtera and Duo Security.
While it’s nice to see people writing about Cisco, it’s not a short-term play. The company has worked hard for a decade to make itself a solid, conservative investment. Let it be one for you.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in CSCO and JPM.