Stock Analysis Cisco Systems

The upcoming stock analysis is about a technology company, which is in my portfolio for a long time now. The position is not that large but  still I think it is a nice add to everyone’s dividend income portfolio. Cisco System therefore can be seen in a lot of portfolios of the dividend investor community. So let’s have a look if it is worth a buy at its current price.

Company Overview

Cisco Systems (CSCO) is a technology company that designs, manufactures, and sells networking equipment. The company focuses on the following segments which include Enterprise and Service Provider, Small Business and the Home. CSCO was founded in 1984, and is based in San Jose, CA. The dividend growth history is rather short, as it has increased its dividend since 2011 and currently pays a quarterly dividend of 0.29 USD.

Valuation

Currently CSCO is priced  at 31.36 USD per share.

If I take the weighted average of the 4 ratios according to the 5  year average the price would be at 28.47 USD. That means the current price is 10.1% above its 5 year average. The 5 year high was at 34.39 USD which was about in May 2017, so currently the stock trades 8.8% below its 5-year high.

The fair market value ratio of the communication equipment sector, according to morningstar is currently at 1.06. If I divide the current price by it I will get a price of 29.58 USD.

Earnings per share growth

In 2011 the EPS were at 1.49 USD and EPS in 2016 were at 2.11 USD. This makes it an average growth per year of 7.21%.  This is a quite stable growth even though the growth is not in double digits anymore it just shows that it is a settled company which has already developed its core business. I see that rather positive than negative.

Dividend History and Future

As I already mentioned CSCO does not have such a long history of dividend growth but its increase rate is very impressive. In the last 5 years, the average growth per year is 50.93% based on a dividend of 0.12 USD in 2011 and a current full year one of 0.94 USD. With the current full year dividend the payout ratio is still on reasonable level, when it comes to EPS and Free Cashflow per share.

An important point for my buying decision is as well the dividend yield on cost, which is currently at 3.70% based on the new yearly dividend of 1.16 USD. After tax my minimum yield, I want to reach within the next 3 years, should be at 2.8%. This means it should have a yield of 3.9% before tax.

Assuming now a dividend growth rate of 10% per year the dividend in 2020 will be at 1.54 USD, which means a yield on costs of 4.92% before tax. Looking at the EPS Forecast of Cisco Systems this growth rate seems to be realistic and also considering this years’ increase of 11.54%.

How much additional dividend income would I generate?

As you can see a current investment of 70 shares would add a nice income to my already existing income. It is also very important to mention in this case, that I consider CSCO as a faster dividend growth stock and that the yield on cost will look very attractive in 5 years from now on.

Conclusion

After all and even though CSCO seems to be a little overvalued currently it is buy for me at this point. The outlook is more than good with forward EPS of 13.0 and more than enough cash flow to keep the pay out ratio on reasonable level. The company has also enough cash on the side to make on or two acquisitions, which are also an important point in this sector for future growth. Cisco for me is definitely one of the tech stocks which are a nice add in everyone’s dividend portfolio.

What do you think about CSCO? Do you already have it in your portfolio or would you buy it at its current price?

Disclosure: Long CSCO

I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding!

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