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 premium to all four valuations above. Since CSCO's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 140.5% premium to its calculated fair value of $20.49. CSCO did not earn any Stars in this section.
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 two Stars in this section for 1.) and 2.) 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% The company has paid a cash dividend to shareholders every year since 2011 and has increased its dividend payments for 13 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
The NPV MMA Diff. of the $57 is below the $2,200 target I look for in a stock that has increased dividends as long as CSCO has. If CSCO grows its dividend at 2.7% per year, it will take 8 years to equal a MMA yielding an estimated 20-year average rate of 3.75%.
Peers: The company’s peer group includes: Juniper Networks, Inc. (JNPR) with a 2.8% yield.
Conclusion: CSCO did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks CSCO as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $21.73 before CSCO's NPV MMA Differential increased to the $2,200 minimum that I look for in a stock with 13 years of consecutive dividend increases. At that price the stock would yield 7.1%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,200 NPV MMA Differential, the calculated rate is 10.7%. This dividend growth rate is higher than the 2.7% used in this analysis, thus providing no 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 significant market share over its next closest 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 at $20.49, it has generated a 13.1% annualized internal rate of return. I will continue to look for opportunities to add to my position when the stock is trading near or below my calculated fair value of $20.49, 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 (3.6% of my Dividend Growth Portfolio).
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