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Once the most valuable corporation in the world back in the late stages of the tech bubble in 2000,
Unlike back at the turn of the millennium, however, Cisco today trades at a discount to the overall market, and it pays a dividend that is quite meaningful. In fact, it just raised the quarterly payout last month to $0.17 per share from $0.15, giving the stock a 3.3% yield.
Founded in 1984, Cisco makes a wide range of switches and other components for Internet protocol communications. Sales for the current year ending July 30 are expected to tick higher by 5.7% to $48.7 billion. Earnings are forecast to grow 7.6% to $1.99 per share. That gives the stock a lean multiple of 10.5 times this year's earnings.
Earnings also provide room for additional dividend hikes, with the current payout ratio just 34% of expected EPS. Free cash flow per share of $1.55 over the past 12 months also helps, as does a cash pile of $46.4 billion, or $8.70 per share. Since initiating the dividend in March 2011 at a quarterly rate of $0.06, Cisco has nearly tripled its cash payout, and it's more than double last year's $0.08 quarterly dividend.
Cisco trades at discounts to its historical multiples of sales and earnings. Its average price-sales ratio over the past three years of 2.995 would produce a $26.08 stock price based on trailing 12-month sales. In addition, its average price-earnings multiple since 2008 has been 17.72 times earnings. With $1.99 of EPS, that average P/E would correspond to a stock price north of $35.
One negative consideration is insider selling. According to InsiderScore.com, Cisco's President of Development and Sales Robert Lloyd put in place a 10b5-1 trading plan on March 22 that allows him to exercise-and-sell up to 879,100 shares through options that expire in the June-September 2014 period, and to sell up to 198,300 shares upon the vesting of stock awards. Planned selling may not be the same as dumping a stock en masse, but it requires some vigilance on the part of investors. Don't give Cisco too much room. Apply a 10% trailing stop to bail out and get in later at cheaper prices if the stock starts to slip.
John Dobosz is editor of Forbes Dividend Investor newsletter. Total return since July 11 for 162 picks is 14.7% vs. 9.8% for the S&P 500. Average yield is 5.7%. Click here for a free-trial membership. Subscribers received the above hotline on April 1.
