Valuation And Dividend Safety Analysis: Cisco System (CSCO)

Cisco Systems, Inc. (NASDAQ:CSCO) is the market leader in networking hardware and software. Cisco returns cash to its shareholders through stock repurchases and a growing dividend. The company is now a Dividend Challenger having raised the dividend for 9 consecutive years. The current yield is approximately 3.75%. The company is highly profitable, generates prodigious cash flow, and has net cash position on the balance sheet. It is unlikely that Cisco will cut or suspended its dividend. The stock price is down due to customers deferring capital expenditures. But the economy will eventually recover, and networking demand is high now due remote working and virtual school. I view Cisco as a long-term buy.

Overview of Cisco Systems, Inc.

Cisco is world’s largest Internet Protocol networking company. The company was founded in 1984. Cisco operates in three business segments: Infrastructure Platforms Group, Security Segment, and Services. Today, the company sells hardware and software for switching, routing, data centers, and wireless applications. Cisco also sells software for networking, analytics, collaboration, and security and firewalls. Cisco is ranked 15th in the 2019 Interbrand’s Best Global Brand list. Cisco had $49,301 million of revenue in 2019.

Selected Data for Cisco Systems, Inc. (NASDAQ)

Cisco Systems Inc

Source: Data from Seeking Alpha (as of October 5, 2020)

Cisco Dividend and Safety

For investors interested in income and dividend growth Cisco pays an annual forward dividend of $1.44 per share and is yielding approximately 3.75% as of this writing. This is a decent yield and much higher than the roughly 1.8% offered by the S&P 500 index. Cisco’s dividend safety metrics are excellent in context of earnings, free cash flow, and the balance sheet.

From an earnings perspective, the dividend was safe in fiscal year 2020 (fiscal year ended July 25, 2020). The payout ratio was about 45%. From a forward earnings perspective the payout ratio is still decent at about 47% based on the forward dividend and consensus fiscal 2021 earnings per share of $3.07. This is below my threshold of 65% and suggest that the dividend is safe. Granted, revenue and earnings will likely be depressed in FY 2021 due to COVID-19. But the payout ratio is still relatively low and seemingly the worst is behind is for COVID-19 at this point.

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