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’s business is organized into three geographic segments: the Americas (59% of 2018 revenue), EMEA (25%) and APJC (16%). Its large offering of products and services can be categorized into infrastructure platforms (57% of 2018 revenue), services (26%), applications (10%), security (5%) and other (2%). 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: 66
- Ticker: NASDAQ:CSCO
- Sector: Technology
- Industry: Communication Equipment
- Market Cap: 197.66B
- P/E: 17.91
- Dividend Yield: 3.01
- Dividend Payout Ratio: 53.23
- FFO Payout Ratio: Dividend Snapshot Members Only
- FCF Payout Ratio: Dividend Snapshot Members Only
- Chowder Score: Dividend Snapshot Members Only
- Piotroski-F Score: Dividend Snapshot Members Only
- 3, 5, 10-year Revenue Growth: Dividend Snapshot Members Only
- 3, 5, 10-year Dividend Growth: Dividend Snapshot 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 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 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.
Cisco 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. 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. The company is firmly focused on meeting the dynamic needs of the industry.
The company introduced intent-based networking to the access network with the launch of the Cisco Catalyst 9000 series of switches, Software-Defined Access (SD-Access), and DNA Center. Cisco’s Catalyst 9000 series of switches has become the fastest ramping product in its history. As the company integrates products and services into architectures, it is selling more software and subscription-based offerings.
Cisco is shifting its business towards a software and subscription-based model which is expected to grant higher visibility to the company’s cash flows. About 32% of Cisco’s revenues are recurring in nature and 54% of its software revenues are subscription-based, which account for stable and visible cash flows. Approximately 75% of Cisco’s revenues come from products while the balance is derived from services. The company is targeting to ultimately drive recurring revenues by applying a subscription-based model across its entire portfolio.
Strong undisputed technology leadership in networking hardware and software, global sales and distribution network, sticky customer relationships with all major telecom carriers and government organizations and a strong balance sheet are Cisco’s key competitive advantages.
Cisco is a Dividend Starter and has successfully raised its dividends each year since it started paying them in 2011. The company returned $23.6 billion to shareholders, comprising $6 billion of dividends and $17.7 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 53% and it last grew its dividend by more than 6%.
The company offers an average yield of 3%. The management intends to return at least 70% 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 $13 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. It recently announced its intent to acquire CloudCherry which is a market leading customer experience management technology company. 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 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.
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 multicloud and intent-based network platforms. A strong balance sheet, large free cash flows, and reasonable payout ratio should support future dividend growth.
Another investment consideration is Cisco’s 5G position to support telecoms like Verizon, Sprint or SoftBank to name a few. The 5G transformation and Wi-Fi 6 should continue to help grow revenues for Cisco.
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.