Company Description: Cisco Systems, Inc. offers a complete line of routers and switching products that connect and manage communications among local and wide area computer networks employing a variety of protocols.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CSCO is trading at a discount to only 1.) above. When also considering the NPV MMA Differential, the stock is trading at a 39.7% discount to its calculated fair value of $52.. CSCO earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CSCO earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CSCO earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2007-2010, 2008-2011, 2009-2012, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 2011 and has increased its dividend payments for 7 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
CSCO earned a Star in this section for its NPV MMA Diff. of the $13,947. This amount is in excess of the $2,800 target I look for in a stock that has increased dividends as long as CSCO has. The stock's current yield of 3.32% exceeds the 1.81% estimated 20-year average MMA rate.
Peers: The company’s peer group includes: Brocade Communications Systems, Inc. (BRCD) with a 2.5% yield, Juniper Networks, Inc. (JNPR) with a 1.7% yield, and Sonus Networks, Inc. (SONS) with a 0.0% yield.
Conclusion: CSCO earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks CSCO as a 5-Star Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $60.38 before CSCO's NPV MMA Differential decreased to the $2,800 minimum that I look for in a stock with 7 years of consecutive dividend increases. At that price the stock would yield 1.7%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,800 NPV MMA Differential, the calculated rate is 9.1%. This dividend growth rate is lower than the 15.0% used in this analysis, thus providing a margin of safety. CSCO has a risk rating of 2.00 which classifies it as a Medium risk stock.
CSCO competes in a highly competitive industry, but is the dominant player with a a 15%-plus market share over its most significant competitor, Hewlett-Packard. Its Ethernet switches and routers, which move data along local computer networks, are considered the gold standard by network managers. An improving economy, high demand for data center solutions and the migration to cloud networking will boost enterprise network spending, in which CSCO will directly benefit.
The company's liquidity provides it with the ability to return value to its shareholders through regular share repurchases and dividends. Since I first recommended and purchased CSCO in December 2013, it has generated a 17.9% annualized internal rate of return. I will continue to look for opportunities to add to my position when the stock is trading below my calculated fair value of $52.00, and as my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in CSCO (3.2% of my Dividend Growth Portfolio). See a list of all my Dividend Growth Portfolio holdings here.
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Tags: CSCO, BRCD, JNPR, SONS,