Dividend Increase: Cisco (CSCO)

Last week, Cisco Systems (CSCO) announced their 2017 dividend increase of $0.03 per share, bringing the new quarterly dividend to $0.29 from last years $0.26.  That increase is good for an 11.5% increase for the year.  The current dividend yield for CSCO is at 3.44% based on the closing price of $33.74.

That increase beats my expectation of a $0.02 increase or 7.69% increase.

This makes 6 years straight of dividend increases from CSCO in the 7 years they have paid dividends. 2012 say 2 increases.

CSCO Dividend History:

Since CSCO initiated a dividend back in 2011, they have grown their dividend at an average of 35.40% per year.  Granted their is a huge outlier in 2012 of more than doubling the dividend.  2013 was a weird year for dividend companies.  There was a threat of a change in the taxation of dividends, so companies advanced dividend payments to shareholders.  Some companies took on debt to declare a special dividend.  Ultimately, tax treatment did not change at the last minute of the year.  CSCO advance their first quarter dividend of 2013, paying it in 2012 instead.  Ultimately, the 7 year dividend history of CSCO has given shareholders an almost 5 fold increase in dividend income at 383% increase for the time period.  Tech remains one of the highest opportunities for dividend growth opportunities.

CSCO vs S&P500

While the dividend growth remains an opportunity for CSOC, one area that is disappointing to look at is the performance of the stock price.  Looking back at the last decade, CSCO has severely underperformed the S&P500.  Networking equipment is a pretty mature space.  Sure, as bandwidth speeds increase, business and companies will need to upgrade equipment, but this will not be the boom from yester years of going from a wired to wireless connection.  CSCO has been stuck in a multi year trading range from the 20s to low 30s.  Thankfully this is a minor holding overall for my portfolio, as I just don’t see real long term capital appreciation opportunities.

CSCO Key Stats:

Market Cap: $171.32 Billion

Beta: 1.28

Dividend Yield: 3.44%

Payout Ratio: 47.37%

Total Cash: $71.85 Billion

Total Debt: $34.92 Billion

Profit Margin: 20.24%

The interesting thing about CSCO (and other tech plays like MSFT and AAPL) is looking at the cash in the piggy bank.  I hate the fact that CSCO has been in a trading range for years and currently sits at the top end of that range.  But cash compared to market cap looks freaking sexy.  Think of it like this, CSCO has about 40% of their market cap sitting in cash.  If we subtract out the debt, that drops to about 21%.  That is a significant portion of the value of the company sitting in cash.  I like to think of that as a safety net.  The question is why do they have that much in cash.  Are their not better investments in the company that can be made?  Is cash being returned to shareholders through dividend increases the new expectation.  I’m all for seeing the dividend increase, and looking at the cash and payout ratio, their is plenty of room for future increases.  However, I want to see share price increase as well.  Where is the revenue growth going to come from to drive share price up.

Conclusion:

I’m mixed on CSCO.  I don’t think now is the time to jump into shares for a new investor.  Waiting for a pullback in price breaking just below 30.  I hate the trading range the stock has been in for a while.  I would like to think there are better days ahead from a stock price standpoint, but don’t see what is really going to drive the price higher.  Hey, even MSFT got it’s grove back after a long time, so there’s hope.  But for now, I think CSCO is more of an income play.  The balance sheet is clean, with significant cash, and a reasonable payout ratio allowing for future high single digit growth rates for the dividend.  So from an income play, CSCO looks good.  As far as capital appreciation, I think there are better plays in tech out there.

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