Cisco: Value, growth, income
This tech leader offers a rising dividend, a compelling valuation and more.
By Stephen Leeb, Leeb Income Performance Report
Many tech stocks still have a lot of growth potential. And if you can find one that both pays a dividend and is attractively valued in terms of both price-to-earnings and price-to-book, you've hit pay dirt.
One such company is Cisco Systems (CSCO), the worldwide leader in making things that connect people to the Internet and to each other. It's No. 1 in many of its markets, including routers, telepresence, wireless LAN, switching, Web conferencing, and security, and it's No. 2 in storage (via area networks). In all, Cisco lets you invest both in Internet growth and in the way the modern world operates.
A high flyer during the dot.com bubble, Cisco has been held down in recent years by contracting price-to-earnings ratios, disappointing earnings, and slow growth in both the U.S. and Europe.
Sales suffered as companies and governments alike delayed large-scale purchases in the age of austerity. And lower-cost competitors took away some of Cisco's customers.
But as investors abandoned the stock, its valuations became increasingly attractive, especially since its core businesses have proved resilient and its balance sheet has remained strong.
In 2011, about 40% of Cisco's total market cap was in cash and marketable securities, and it was clearly only a matter of time before it began to generate income.
Today, after establishing a dividend in the summer of 2011 and raising it twice since then, Cisco is a bona fide income stock, with an indicated yield of 2.6%. And it continues to be a compelling valuation story, selling at a current price-to-earnings ratio of 13.5, an expected price-to-earnings ratio of only 10, a price-to-earnings-to-growth (PEG) ratio of 1.1, and a price-to-book ratio of only 2.1.
Of course, these attractive values reflect the market's lingering concerns about Cisco's growth and economic sensitivity. But there are indications that the company's business is improving faster than the Street anticipates. Cisco has been steadily regaining lost market share as quality takes center stage again.
And it's among those companies poised to benefit from the explosion in the demand for data, thanks to its data center business.
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