With shares of networking giant Cisco Systems (NASDAQ: CSCO) up 30% over the past year, it may seem the opportunity to invest in the stock at a good price has already passed. But there are plenty of reasons the stock is still attractive for long-term investors, despite the much higher price compared to one year ago. Here are three reasons that investors should consider buying shares of Cisco.
Dominant in core markets, and growing in others
Cisco generated 30% of its revenue during its latest quarter from switches, the hardware that connects computers together to form networks. After a turbulent period over the past year, driven by weakness in emerging markets and from Cisco's service provider customers, the switching business grew by 11% during Cisco's fiscal second quarter.
Cisco absolutely dominates the switching market, and its market share has even been growing. During the third calendar quarter of 2014, industry researcher IDC puts Cisco's switching market share at 62.9%, up from 61.8% during the third quarter of 2013. The company in second place, Hewlett-Packard, has just a 9.3% market share.
In addition to being the leader in switches, Cisco also has some smaller segments that are growing fast. In particular, its data center segment, which includes servers, grew by 40% year over year last quarter, accounting for about 7% of Cisco's revenue. In just a few years, Cisco has grown the business substantially, and the company is now the market leader in the North American x86 blade server market, coming in second place globally. In 2009, Cisco had just a low-single-digit share of the market. With strong core businesses along with smaller, fast-growing segments, Cisco is becoming more diversified while still generating plenty of profits.
A top dividend stock, with room to grow
Cisco's dividend is fairly new, initiated in 2011, but it didn't take long for the company to become one of the best tech dividend stocks. It has been raising the dividend relentlessly over the past few years, and after the latest increase of 10.5% earlier this year, the stock now yields about 2.9%.
Cisco now has a dividend yield similar to those of other big tech companies such as Microsoft and IBM, and there's still plenty of room for growth. While Cisco's payout ratio based on fiscal 2014 EPS currently sits at 56%, the company generates quite a bit more free cash flow. In 2014, Cisco's free cash flow was about $11 billion, or $2.14 per share. With annual dividend payments of $0.84 per share expected over the next year, the payout ratio based on the free cash flow is a far lower 39%.
Even without much earnings growth, Cisco can still afford to increase its dividend considerably for many years to come. The company is also actively buying back its own shares, pushing down its share count. Cisco is now returning more cash to shareholders than ever before, making it one of the top tech dividend stocks around.
A good value
Even though shares of Cisco have risen more than 30% in the past year, the stock still offers a good value to investors. It trades at about 13.3 times the average analyst earnings estimate for fiscal 2015, but this number doesn't account for the massive pile of cash that Cisco has sitting on its balance sheet.
At the end of the most recently reported quarter, Cisco had $53 billion in cash and about $20 billion in debt, leaving a net cash position of $33 billion, or $6.40 per share. The adjusted P/E ratio, where this excess cash is subtracted from the stock price, is just 10.3.
For a company as dominant as Cisco, a P/E ratio of around 10 seems low. There are certainly risks for Cisco going forward, including the potential for commodity hardware to eat away at its market share, and for China to follow through on reducing its dependence on foreign technology products. But there are plenty of growth opportunities as well, and with an attractive dividend and cheap valuation, Cisco is a stock to consider.
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Timothy Green owns shares of Cisco Systems and International Business Machines.