Cisco: Cash is king

This cash-rich tech company is well positioned to benefit from rising interest rates.

By TheStockAdvisors Jul 8, 2013 8:55AM

The Cisco Systems International BV headquarters in Amsterdam © Jock Fistick/Bloomberg via Getty ImagesBy Chuck Carlson, DRIP Investor


"Cash is king" is one of those sayings that investors throw around as a market "truism" that isn't always true.


In the low-interest-rate environment that has existed in recent years, companies with lots of cash have received investor scorn for having such a large unproductive asset on the balance sheet. Of course, cash becomes more attractive to investors if returns on cash improve, which means higher rates.


And the good news (or bad news, depending on whether you have lots or little cash) is that interest rates are rising.


While rising rates are not necessarily good for bonds or stocks, one way to hedge equities against higher rates is to own companies whose balance sheets are positioned to benefit from higher rates.


Those would be companies with lots of cash, especially relative to debt levels.


One of my favorites is Cisco Systems (CSCO). The company's net cash per share represents nearly one-quarter of the stock price.


Cisco is one of several technology companies that generates prodigious amounts of cash. That cash flow has helped Cisco more than double its dividend since 2012. The stock currently yields nearly 3%.


The company has beaten earnings estimates in each of the last four quarters. Cisco trades at less than 13 times the consensus fiscal 2013 earnings estimate of $2 per share.


And when you wash out the cash, the stock's multiple drops to less than 10 times earnings. The stock has performed better in recent trading and should be one of the top performers in the tech sector in the second half of the year.


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