A stock that’s almost as old as the Internet itself, this routing and switching pioneer is moving into faster-growing fields.
As demand for its traditional business slows, the company is moving into accelerating fields like security and conferencing software with a growth strategy that includes key acquisitions and high research spending. The stock is trading at a very reasonable multiple to future earnings and raised its dividend this year, for a current yield of 2.8%.
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CISCO SYSTEMS INC. (Nasdaq symbol CSCO; www.cisco.com) is a leading maker of hardware and software for linking and managing computer networks.
In its fiscal 2018 fourth quarter, ended July 28, 2018, Cisco’s earnings rose 8.0%, to $3.33 billion from $3.08 billion a year earlier. During the quarter, the company spent $6.0 billion on share repurchases; as a result, earnings per share moved up 14.8%, to $0.70 from $0.61, on fewer shares outstanding.
Those figures exclude costs to integrate recent acquisitions, one-time charges related to the new U.S. tax laws and other unusual items. On that basis, the latest earnings beat the consensus estimate of $0.69.
Revenue in the quarter improved 5.9%, to $12.84 billion from $12.13 billion. That also beat the consensus forecast of $12.76 billion.
In response to slowing demand for the company’s hardware—traditional routers and switches—Cisco continues to expand into faster-growing fields such as software for managing network security, conferencing and collaboration. In the latest quarter, recurring revenue from those subscriptions accounted for 32% of the total, up from 31% a year earlier.
The company expects its revenue in the first quarter of fiscal 2019 to rise by 5% to 7%. It also expects to earn between $0.70 and $0.72 a share, which is ahead of the consensus forecast of $0.69.
Value Stocks: Security on the cloud expected to send profits higher
As part of its transition strategy, the company recently agreed to buy Duo Security Inc. The privately held firm makes software that uses a two-step process to verify a person’s identity before letting them connect to a client’s cloud-based system. Duo’s software also scans devices for out-of-date software that could corrupt a network.
Cisco will pay $2.35 billion in cash and shares for Duo when it completes the purchase later this year. The company can easily afford the purchase amount. As of July 28, 2018, the company held cash and investments of $46.5 billion, or $9.89 a share. As well, its long-term debt is $20.3 billion, a low 9% of its market cap. The company’s strong balance sheet will continue to support its growth.
In April 2018, Cisco raised its quarterly dividend by 13.8%, to $0.33 a share from $0.29. The new annual rate of $1.32 yields 2.8%. The dividend has grown an average of 14.2% annually over the last 5 years.
The company expects its revenue in the first quarter of fiscal 2019 to rise by 5% to 7%. It also expects to earn between $0.70 and $0.72 a share, which is ahead of the consensus forecast of $0.69. The stock trades at 17.8 times the $2.65 it is expected to earn for fiscal 2019. That’s an attractive multiple, particularly for a company that spends a high 13% of its revenue on research.
Recommendation in Wall Street Stock Forecaster: Cisco Systems is a buy.
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