11-04-2013, 08:45 PM
Having sold off some of my Intel, and inspired by thoughts around here about various tech holdings, I decided to have a closer look at Cisco tonight. This is not a company that I’ve followed before, but it is often discussed as a solid dividend growth prospect, and it could help me to diversify the tech portion of my portfolio. Here’s what I found:
Cisco scores a very respectable 67 in my very rudimentary scoring system, earning top marks in many important categories.
With a P/E ratio below 13, and perhaps well below 13 if you look at this year’s projected earnings, it is hard to argue that CSCO is overvalued. Whether it is a bargain at these prices is another question, as tech companies seem to command lower than average multiples these days, probably given the fast-changing nature of the industries.
One (possibly) weak link from a dividend growth perspective is the short history of dividend raises, which currently only stands at three consecutive years (though it looks like it will be four soon). I and many other dividend growth investors like to see a long history of annual dividend raises, signaling that commitment to growing the dividend is part of the corporate culture. But there is another side to this coin that I am starting to appreciate more and more. Short-streak companies may be in a much better position to provide outsized dividend growth. And indeed, that is something that Cisco may be poised to do. CSCO initiated the dividend in 2011, paying out 18 cents that year. They doubled it to 36 cents in 2012, and are on track to pay out 65 cents per share in 2013. By my math, that is a dividend growth rate of over 90 percent. Now, of course I do not suspect the growth rate will be anywhere near that going forward, especially over the long term, but this could be a healthy grower for a while going forward. Especially that the payout ratio, around 30 to 35 percent, leaves plenty of headroom for dividend growth.
Earnings is a bit of a tricky story for CSCO, as I look at it. The five-year earnings growth rate is in the 7 to 11 percent range. But breaking that down a bit, they earned $1.27 in 2007, and then (with some slight fluctuation) earned $1.15 in 2011 – little growth to speak of. But then between 2011 and 2012 earnings boomed from $1.15 to $1.55, and 2013 is going to eclipse the 2012 number again solidly. So the past two years, earnings are indeed growing quickly – a critical metric required for sustained dividend growth.
Finally, the yield is right around 3 percent at the moment. Not spectacular, but nothing to sneeze at, either. Especially if they continue to grow it at a good clip in coming years.
I’ve read several articles lately arguing that Cisco is a real bargain at these prices. I’m not sure about that. I’ve expressed plenty of doubts in various threads here about the role of tech companies in a conservative dividend growth portfolio. I can tell you with confidence what PG or MO is going to look like in 10 or 20 years. Not so much with tech. But I am intrigued by CSCO, and may initiate a small position to replace some of the INTC that I sold.
Cisco scores a very respectable 67 in my very rudimentary scoring system, earning top marks in many important categories.
With a P/E ratio below 13, and perhaps well below 13 if you look at this year’s projected earnings, it is hard to argue that CSCO is overvalued. Whether it is a bargain at these prices is another question, as tech companies seem to command lower than average multiples these days, probably given the fast-changing nature of the industries.
One (possibly) weak link from a dividend growth perspective is the short history of dividend raises, which currently only stands at three consecutive years (though it looks like it will be four soon). I and many other dividend growth investors like to see a long history of annual dividend raises, signaling that commitment to growing the dividend is part of the corporate culture. But there is another side to this coin that I am starting to appreciate more and more. Short-streak companies may be in a much better position to provide outsized dividend growth. And indeed, that is something that Cisco may be poised to do. CSCO initiated the dividend in 2011, paying out 18 cents that year. They doubled it to 36 cents in 2012, and are on track to pay out 65 cents per share in 2013. By my math, that is a dividend growth rate of over 90 percent. Now, of course I do not suspect the growth rate will be anywhere near that going forward, especially over the long term, but this could be a healthy grower for a while going forward. Especially that the payout ratio, around 30 to 35 percent, leaves plenty of headroom for dividend growth.
Earnings is a bit of a tricky story for CSCO, as I look at it. The five-year earnings growth rate is in the 7 to 11 percent range. But breaking that down a bit, they earned $1.27 in 2007, and then (with some slight fluctuation) earned $1.15 in 2011 – little growth to speak of. But then between 2011 and 2012 earnings boomed from $1.15 to $1.55, and 2013 is going to eclipse the 2012 number again solidly. So the past two years, earnings are indeed growing quickly – a critical metric required for sustained dividend growth.
Finally, the yield is right around 3 percent at the moment. Not spectacular, but nothing to sneeze at, either. Especially if they continue to grow it at a good clip in coming years.
I’ve read several articles lately arguing that Cisco is a real bargain at these prices. I’m not sure about that. I’ve expressed plenty of doubts in various threads here about the role of tech companies in a conservative dividend growth portfolio. I can tell you with confidence what PG or MO is going to look like in 10 or 20 years. Not so much with tech. But I am intrigued by CSCO, and may initiate a small position to replace some of the INTC that I sold.