Cisco Systems is the largest producer and seller of networking equipment such as routers and switches globally. It is the undisputed global leader in the area of telecommunications and networking hardware and software. It supplies communication software delivering a secure and intelligent platform for digital businesses. Cisco is the leader in application monitoring and analytics. A majority of the Fortune 100 companies are now using one or more of Cisco security solutions.
Cisco’s business is organized into three geographic segments: the Americas (~60% of 2019 revenue), EMEA (~25%) and APJC (~15%). Service revenue accounts for nearly 25% of total revenue, while its large product offering can be categorized into infrastructure platforms (58% of 2019 revenue), applications (11%), security (5%) and others (~1%). Cisco owns and operates strong R&D capabilities, a massive patent portfolio, a global sales and marketing network spread across 95 countries serving thousands of customers globally.Investment Data
- Opportunity Score: 65
- Ticker: NASDAQ:CSCO
- Sector: Technology
- Industry: Communication Equipment
- Market Cap: 170.99B
- P/E: 15.72
- Dividend Yield: 3.57
- Dividend Payout Ratio: 56.25
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
Revenue Growth & Market Exposure
Cisco maintains a dominant market share position in many of its core offerings. The company has come a long way from just selling basic networking equipment to providing high-value solutions today. It has a large, globally diversified customer base including businesses of all sizes, public institutions, governments, and telecom service providers. For decades, customers have been trusting Cisco for its ability to provide a highly secure, intelligent platform for digital businesses. As a leading global technology company, Cisco has been inventing new technologies and products that have been powering the internet for more than three decades. All major telecom carriers in the world rely on Cisco’s critical networking equipment. The company has strategic partnerships with technology giants like Apple, IBM, and Microsoft.
Cisco is shifting its business towards software and subscription-based model which is expected to grant higher visibility to the company’s cash flows. About 72% of its software revenues are subscription-based, which increased by 9% YoY. Cisco’s transition to software continues to make good progress and aligns customer behavior towards consuming its technology and reducing the impact of macroeconomic shifts in the future. In the second quarter of fiscal 2019, Cisco completed the sale of the Service Provider Video Software Solutions (SPVSS) business.
Cisco continues to invest in innovation and expanding its market opportunities. It spends nearly 13% of its revenues on R&D annually. It owns a substantial number of patents and trademarks in the USA and in other countries as well. The company’s innovation pipeline remains strong and is focused on helping its customers achieve their business objectives. Cisco announced several exciting additions to its portfolio, including network automation and analytics, cloud-based networking, collaboration, as well as new security capabilities. The company remains well positioned to capitalize on the tremendous opportunities across cloud, automation, 5G, security, and collaboration.
Cisco’s enterprise networking portfolio continued to grow as its customers increasingly adopt its intent-based networking portfolio, spanning its Catalyst 9000 family of switches, Meraki cloud based platforms and next generation data center solutions. The company is automating connectivity across the cloud. It also announced a partnership with Microsoft to help its customers improve network connectivity. Cisco continues to expand its cloud managed network and security offerings.
Cisco is trusted by top companies around the world for its comprehensive and integrated cybersecurity platform. About 95% of the Fortune 500 use Cisco’s collaboration portfolio. It launched next generation WebEx, enabling better teamwork and end-to-end secure encryption. Cisco also announced integration with Microsoft, Azure Virtual WAN and Office 365 along with a deeper partnership with Amazon Web Services to deliver highly secure end-to-end connectivity and better application performance. It is also witnessing strong growth in its App Dynamics business.
Cisco is a Dividend Starter and has successfully raised its dividends each year since it started paying them in 2011. The company returned ~$27 billion to shareholders, comprising $6 billion in dividends and $20.7 billion of share repurchases in the last year. It has a good dividend growth record compounding them annually at an aggressive ~15% over the last five years. Its payout ratio is also safe at 55% and it last grew its dividend by 12.9% annually.
The company offers an average yield of 2.9%. The management intends to return at least 50% of Cisco’s free cash flow to shareholders annually. Though Cisco’s revenues have remained flat in the last few years, its free cash flows and reasonable payout ratio grants enough room for future dividend growth. Cisco’s rock-solid balance sheet, generating over $14.9 billion in free cash flows in the last year itself, should also support future dividend hikes.
Cisco is also growing through acquisition and has made inorganic growth a key part of its strategy. It has acquired 200 companies in the last decade which has helped it expand into new horizons such as IoT, application intelligence, AI, hyperconvergence and SD-WAN. Cisco’s acquisition of Duo Security expanded its cloud security capabilities. The company is well positioned to emerge as a winner from growing trends in automation, security, and analytics across the entire network infrastructure through both organic as well as inorganic growth. Cisco continues to invest in organic and inorganic innovation to position itself for the long term.
Cisco’s ability to develop and launch new products at a fast pace grants it a competitive edge over peers. Cisco 8000 series is the backbone product for 5G networks and the company has witnessed success on IP infrastructure to support 5G rollouts for over 30 customers around the world. The company expects 400 gig transition, as well as the 5G build-out, to be the future growth drivers.
Cisco operates in the networking and communications equipment markets which are highly competitive. The company competes with numerous vendors in each product category. Its major competitors include Amazon Web Services, Arista Networks, Dell Technologies, Fortinet, Hewlett-Packard Enterprise, Huawei Technologies, Juniper Networks, Lenovo Group, Microsoft Corporation, Nokia, Symantec Corporation, Ubiquiti Networks, and VMware, etc.
Cisco is known for providing a cognitive highly secure and analytics-driven collaboration platform. The company continues to focus on developing groundbreaking technologies and building a new Internet for the 5G era that will help its customers innovate faster. The company is firmly focused on meeting the dynamic needs of the industry. Market leadership, breadth of portfolio, global scale and customer loyalty are Cisco’s strong competitive advantages. Cisco is very well positioned to benefit from the increasing adoption of multi-cloud and intent-based network platforms. A strong balance sheet, large free cash flows, and a reasonable payout ratio should support future dividend growth.
DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.