Cisco Systems, Inc. (NASDAQ:O:CSCO) has been consistent, at least, on a few parameters. For instance, it rarely misses to meet the Street analysts’ expectations. In the last four quarters, its earnings exceeded the expectations between one cent and three cents a share or 1.9% – 5.4%. However, the current macro environment is somewhat uneven, and it is a natural question whether the company could still continue to deliver better than estimated bottom line numbers. It was probably because of the safe and consistent performance, the stock has been termed a defensive one in an uneven market trend. The tech sector is undergoing a difficult phase and some of the factors like the dividend yield, its leadership status, strong execution, and cash-driven balance sheet position itself as a safe bet.
Tops Seven Of Seven Key Markets
One of the favorable factors for Cisco Systems, Inc. (NASDAQ:CSCO) was that it dominated six of the seven important markets of technology infrastructure last year. That came in despite Hewlett Packard Enterprise Co’s (N:HPE) gaining significantly in a number of the tech sectors. That only indicated the growing strength as a competitor. Both companies were able to move up in the sector significantly at the cost of other vendors, Synergy Research Group indicated. The network switch maker’s market share advanced in seven categories while HPE posted a wide-spread challenge to the dominance of Cisco. However, the key factor was that it was not eroding CSCO share.
The one category that Cisco Systems, Inc. (NASDAQ:CSCO) struggled and where Hewlett Packard Enterprise Co (NYSE:HPE) gained was data center servers. Though both have gained their share in the server market, the network switch maker was only behind Dell, which was second placed in the segment. In any case, it has a leadership position in other six categories, i.e. telepresence, unified communication, wireless LAN, routers, voice systems, and Ethernet switches. According to Synergy analyst, Jeremy Duke, the company remained in its own league as its market share grew by a percentage point to 33% in 2015 from the preceding year’s 32%.
Infrastructure Markets Growth
The technology infrastructure markets’ average was worth $80 billion representing an improvement of 2.3% in the last year from the preceding year period. If Cisco Systems, Inc. (NASDAQ:CSCO) managed to increase its market share by a percentage point, then its revenue should have witnessed more than the average growth pace of 2.3%. There were also other companies that increased their market share in the last year. For instance, Hewlett Packard Enterprise Co (NYSE:HPE) boosted its share in LAN while Microsoft Corporation (NASDAQ:O:MSFT) lifted its share in UC, as well as, voice markets. Arista Networks (N:ANET) also increased its share in Ethernet switching. However, it was Cisco that continued to enjoy the leadership position in the six segments.
Dividend Provides Solid Yield
At a time when tech stocks are either struggling for upside or have lofty valuations, Cisco Systems, Inc. (NASDAQ:CSCO) also offered a solid yield for its dividend. The company’s current dividend’s yield was 3.6%, which was higher than the five-year average yield of 2.6%, as well as, S&P500’s 2.3%. Though some investors might consider the stock to be a slow-growth one, it has been paying a decent dividend in the past and the capability to increase the dividend rate too. The dividend payout ratio was 45.0%, which was also better than the 37.0% of the five-year average payout ratio. Similarly, in the last three-year period, the company’s dividend growth rate was 19.4%.
Let’s also see how Cisco Systems, Inc. (NASDAQ:CSCO)’s rivals are delivering the dividend rate. Its nearest rival, Juniper Networks, Inc. (NYSE:N:JNPR)’s provided only 1.5% dividend yield. Another factor in favor of Cisco was the increased payout of its free cash flow compared to its rivals. It paid out 36% as dividends while its rival paid only 19% in the last one-year period. There were, at least, two factors that were driving the leader. One was the confidence with which it can maintain, and the other was the increasing free cash flow. For instance, the leading network switch maker’s free cash flow grew 26% whereas Juniper’s was only 12% in the last trailing twelve-month period. Also, the company bought back shares worth $1.2 billion in the last reported quarter. Along with that, it returned 91% of its free cash flow or $2.3 billion.
Analyst Comments
Drexel Hamilton analyst, Brian White, pointed out another area that Cisco Systems, Inc. (NASDAQ:CSCO) stands to gain was its presence on the cloud. He said that the company was working hard to create its own portfolio apart from extending its initiative on Intercloud. In the upcoming period, the analyst expects the company to gain from software portfolio to fuel its revenue uptick, as well as, boost the profitability. Currently, the cloud is gaining more traction, and it has been involved in several of its services to the cloud. That included IT and it would maintain its accelerated growth in the current year too apart from being competitive in the marketplace.
The analyst believes Cisco Systems, Inc. (NASDAQ:CSCO)’s valuation was attractive. In the difficult tech conditions, the company gain importance from the cash-rich balance sheet, rich dividend yield, strong execution, and its leadership position to command a price target of $34. He added that the stock offered a reasonable multiple of 12x. The brokerage has a rating of Buy on the company shares.
Conclusion
Cisco Systems, Inc. (NASDAQ:CSCO) shares are known to be consistent. It does not increase dramatically to warrant a significant drop also. The stock might offer slower growth but it should be steady. The dividend yield is an additional factor that goes well with the stock.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.