Cisco enters the digital dividend club

The world's largest maker of computer networking equipment joins Microsoft and Intel to form a troika of income-producing technology companies.

By TheStreet Staff Aug 28, 2012 1:37PM

By Marc Courtenay


Another bellwether of the big technology companies, Cisco Systems (CSCO) is earning enough income to pay a generous dividend to income-hungry investors.


Cisco's yield-to-price is up to 2.9% based on a $19.32 share price. That makes it comparable to Intel's (INTC) 3.63% dividend yield, based on a recent share price of $24.80 and Microsoft's (MSFT) 2.61% yield based on a stock price of $30.60.
(Microsoft owns and publishes Top Stocks, an MSN Money site.)

Interesting, too, is the fact that all three companies are trading at a share price that reflects a forward price-to-earnings ratio under 10, with both CSCO and MSFT trading at closer to nine times forward earnings. These kinds of multiples suggest the members of this troika might be considered "value stocks," in line with some of the healthier, growth-oriented utility companies.


Cisco had an excellent second quarter if measured by net income, which rose 56% in its fiscal fourth quarter. Revenue rose 4.4%, which brings its trailing 12-month revenue to more than $46 billion. That brings revenue per share to $8.58.


The most recent quarter's total cash surged above $48 billion, and levered free cash flow is up to $9.3 billion for the trailing 12-month period. With Cisco's $.56 annual dividend, the payout ratio is a sustainable 19%, and if profits keep rising, I'd expect that dividend payout to increase.


Cisco made it clear in its quarterly report that it would return more than 50% of its free cash flow to shareholders between the dividend and the regular share-buyback program.


What impressed Wall Street and many analysts was CEO John Chambers' cheery, optimistic tone in the prepared text of his comments and announcements. He said Cisco's business operations in the U.S. were hanging in there nicely, although the situation in Europe remained challenging.


In the U.S., Chambers noted orders increased at the end of the company's last quarter and its biggest customers were buying Cisco products once again. Chambers mentioned a shift in the company's approach to networking that emphasizes software. That helped explain the recent $1 billion acquisition of a startup company that has been breaking ground in this very new way of networking, which is in its infancy.


Here's a chart that demonstrates how the share price of CSCO has followed both earnings per share and revenue growth. 


Cisco's cost-saving efforts have come at an unfortunate price. Last year the company cancelled plans to focus on its core networking business and had to cut a large number of jobs as a result. In July it announced it was cutting an additional 2% of its employees, eliminating around 1,300 more positions.


Cisco's $16.33 billion in total debt gives them a total debt/equity ratio of almost 32, compared with Intel's 15 and Microsoft's ratio of 19.


When it comes to return on equity numbers, Cisco's is 16.32%. This is also behind the other members of the "digital dividend club." Microsoft's ROE is an impressive 27.51%, and Intel's trailing 12-months ROE stands at 25.42%.


Perhaps Cisco will find ways to increase ROE in the quarters ahead, which is yet to be seen. The fact that the big companies it sells to are buying again is an encouraging sign, but it will have to prove itself to investors if it wants to be accorded the same respect and admiration as a Microsoft or an Intel.


Raising the dividend to a comparable level and doing something about reducing the dilution of its shares are both positive steps in the right direction for Cisco Systems. Two good quarters in a row, if that's the outlook, would also do a lot to restore it to a level anywhere near its former days of glory.


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