Cisco (NASDAQ:CSCO) should benefit from the company’s slow progress in turning its ship around. CSCO stock is off a little over 18% from its summer highs.
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Cisco stock ended 2019 up about 11% for the year. This is well short of the 22% gain in the Dow Jones Industrial Average, of which CSCO is a component. Moreover, tech stocks rose over 48% during 2019. So Cisco’s performance was clearly a laggard.
What happened? Cisco stock got hit in the middle of the year from two consecutive disappointing earnings releases. Nevertheless, non-GAAP earnings per share for the fiscal 2019 rose 20% year-over-year.
Moreover, Cisco’s first quarter in fiscal 2020 (ending in October 2019) showed progress. Its earnings per share on a non-GAAP basis rose 12% year-over-year to 84 cents. Expectations were for 82 cents per share based on the company’s guidance in the prior quarter.
Cisco’s Transformation
Despite the good EPS news, the U.S.-China tariffs and trade disputes hurt Cisco’s revenue growth. Revenue grew just 2% year-over-year in its first quarter. Moreover, the company is looking for revenue to decline 3%-5% for the quarter ending in January 2020.
Nevertheless, it still reported that 12% year-over-year EPS growth. Cisco is moving into new lines of business, including a new custom processor for 5G networks and applications.
In addition, software products are now 30% of sales and Cisco intends to move that up to 50% over time. Moreover, subscription-based products now represent 71% of software revenue. It’s clear that Cisco intends to transform its business model to one revolving around subscriptions.
Cash Flow, Dividends and Buybacks
The good news is that Cisco produced $3.6 billion in operating cash flow for its first fiscal quarter. That allowed the company to return capital to shareholders on a grand scale.
For example, Cisco used $1.5 billion of the operating cash flow to pay dividends. This was set at quarterly payments of 35 cents a share, giving Cisco stock an annualized dividend yield of almost 3%.
In addition, Cisco repurchased about 16 million shares of its common stock for $768 million. This represents about 1.1% in buybacks on an annualized basis. That is not much, but it’s a start.
More importantly, Cisco repaid $2.7 billion of debt. This raised the company’s net cash position to $9.1 billion, up 3.9% since the end of fiscal 2019. You can see this on the table at the right.
So this is a great return for shareholders. Dividends were paid, shares outstanding were reduced and net cash rose. All of this signifies a company that is healthy financially.
The Bottom Line on Cisco Stock
Right now the market is not very confident about Cisco’s slow business model turnaround. Cisco stock trades for just 14 times forward earnings expectations. That is not very expensive for a technology stock in the U.S. market.
Analysts are starting to take notice. Barron’s recently reported that Barclays analyst Tim Long turned bullish on Cisco stock early in December 2019.
One Seeking Alpha analyst wrote a detailed analysis of Cisco’s new silicon chip in a very insightful article in December.
Investors may want to watch Cisco’s progress this year as it reports earnings. It may make sense to buy Cisco stock on dips, especially, for example, when it reports disappointing earnings.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers receive a two-week free trial.
