Cisco’s balance sheet is rock solid and virtually guarantees the safety of its dividend. As seen below, the company has $60 billion in cash compared to $22 billion in debt, and it has nearly $15 in cash for every $1 it paid out as a dividend last year. Cisco has ample capacity to continue acquiring businesses, repurchasing shares, and paying higher dividends.
Source: Simply Safe Dividends
Overall, Cisco’s dividend payment looks extremely safe. The company has relatively low payout ratios, generates predictable free cash flow, has a steady business model, and maintains an outstanding balance sheet.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
Cisco’s healthy payout ratio, strong cash balance, and excellent free cash flow generation make for a stock with great dividend growth potential. The company’s Dividend Growth Score is a solid 80, and management has aggressively raised Cisco’s dividend since the business began paying one in 2011.
Cisco most recently raised its dividend by 24% in February 2016 and has boosted its payout every year since 2011. Cisco expects to return 50% of its free cash flow to shareholders in the form of share buybacks and dividends and seems poised to continue delivering strong dividend growth.
Source: Simply Safe Dividends
Valuation
Like some other mega cap, “old” technology companies, Cisco’s valuation looks rather undemanding. The company’s stock trades at 12x forward earnings estimates and has a healthy dividend yield of 3.7%.
If the company’s $7.50 per share net cash is excluded, CSCO’s stock trades for approximately 9x forward earnings estimates.
Whenever a stock looks this cheap, especially one with a great balance sheet and consistent free cash flow generation, it’s usually because investors don’t believe the company can generate profitable long-term growth. International Business Machines Corp. (NYSE:IBM) has been treated the same way.
Cisco Systems, Inc. (NASDAQ:CSCO) has managed to squeeze out modest revenue growth and higher earnings in its recent quarters, but the market is clearly expressing some concern about the company’s long-term relevance in the ever-changing world of technology.
If Cisco can continue compounding its earnings per share at a mid-single digit rate like it has historically, the stock appears to offer annual total potential of 8-10%. If investors regain confidence in the company’s long-term future, its earnings multiple would likely expand as well.
In our view, Cisco’s valuation is quite reasonable and seems to have somewhat limited downside risk.
Conclusion
Cisco’s dividend looks great, and had the company started paying dividends much sooner than 2011, it would probably be in the same discussion with other blue chip dividend stocks. Regardless, Cisco’s dividend looks extremely safe with above-average growth prospects.
While we think Cisco has built up a durable franchise in network equipment and services, it’s hard to not wonder why the market is so pessimistic about the company’s future.
Business trends and market share are currently stable, and there is no end in sight to the gobs of cash Cisco is generating.
Technology trends are certainly evolving and we remain in the early days of software-defined networking, but Cisco would seem to have the financial firepower, partners, installed base, and brand recognition to remain relevant.
We will add Cisco to our Watch List and become particularly interested if its dividend yield crosses the 4% mark.
Disclosure: None
