Today, Cisco (ticker: CSCO ) is much smaller yet a far better investment, offering a healthy 3.6% dividend yield, a compelling valuation and stability.
Like other tech heavyweights, Cisco weathered a tumultuous first quarter better than many smaller and younger players. Cisco shares have gained 23% since hitting a 52-week low in February.
And today, there’s one less naysayer among sell-side analysts. JPMorgan, which has been bearish on the stock for the past two years, upgraded Cisco to Neutral from Underweight. The shares climbed 1.3% to $27.92.
Granted, analyst Rod Hall isn’t banging the table on the stock. Cisco’s earnings growth is tepid. And with a price target of $27.50, Hall sees no room for upside over the next year, arguing that at 12 times forward earnings, the world’s largest maker of networking equipment trades in line with its historical average.
Yet Cisco trades at a steep discount to the broader market. And after announcing a 24% dividend hike in February (raising its quarterly cash payout to 26 cents a share), Cisco has one of the highest dividend yields of any large-cap value stock in the Standard & Poor’s 500, according to Hall. Thus, investors are getting paid to hold a stock that faces little downside risk thanks to conservative financial forecasts.
Cisco’s main business involves making switches and routers used to help connect computers to each other and the Internet. This has been under pressure from increasing competition.
Cisco has experienced faster growth in newer kinds of products, including conferencing hardware and software. And some bulls see upside in its cloud business. But a slowdown in Cisco’s server business has raised concerns about spending by corporate customers.
As a result, analysts surveyed by Thomson Reuters see per-share profit climbing more than 4% during the current fiscal year ending in July to $2.30 on revenue of $49 billion. Earnings are expected to rise to $2.39 per share next year.
In February, Barron’s called Cisco “one of the cheaper ways to own a stable business generating massive amounts of cash.”
Cheap is right. Even after its recent rally, Cisco fetches a nearly 30% discount to both the broader tech sector and the S&P 500 index. Yet the company has generated free cash flow totaling $8.7 billion over the past nine months and finished its most recent quarter in January with more than $60 billion in cash on its balance sheet.
In February, Cisco expanded its share repurchase plan by $15 billion. The company, meanwhile, has pursued a rash of midsized deals, including last month’s $320 million purchase of Israeli chip designer Leaba Semiconductor.
However, some analysts don’t see value. Bank of America-Merrill Lynch analyst Tal Liani downgraded Cisco to Neutral from Buy, citing worries about growth.
Still, Liani raised his price target to $30, which assumes a nearly 8% price increase. And if you give Cisco a market multiple 16.5 times forward earnings that puts the stock at $37.
