Top Picks 2017: Cisco Systems

01/19/2017 6:00 am EST

Focus: STOCKS

Annell Danczyk, CFA

Senior Portfolio Manager, Stack Financial Management

Our Top Pick for conservative investors is a global leader in data networking and communications, explains Annell Danczyk, senior portfolio manager at Stack Financial Management and contributor to InvesTech Research.

Cisco Systems (CSCO) carries impressive scale and brand-strength in its core markets of switches and routers, which provide a foundation for a large and steady cash flow.

This characteristic is both sought by conservative income investors and desired to fuel growth.

A dominant company in the tech sector, Cisco possesses the key competitive advantage of holding the #1 or #2 positions in most of its market segments. 

Its switches and routers are considered the superior industry choice and command a premium price. It’s estimated that Cisco branded equipment runs about 60% of enterprise area networks. 

Although a slow decline in revenue in CSCO’s traditional business segment is projected, the company has acted methodically to shift its emphasis to cloud-based solutions and capitalize on the changing industry environment.

Management has done a great job of promoting innovation within the company to shift focus to some of the faster-growing, complementary segments of the market. 

As part of this plan, Cisco completed a series of timely acquisitions in 2016.  Several of these resulted from the strategy to beef-up cybersecurity products.

Other acquisitions have capitalized on industry shifts toward an emphasis on wireless, collaboration, and data center products. Moreover, Cisco spent over $6 billion on R&D last year. 

Intentions have been voiced by the Trump administration to lower the corporate tax rate on funds brought back to the U.S. from foreign countries. 

If CSCO could free up its $60 billion stockpile of cash located overseas, management has stated it would be used to fund buybacks, additional acquisitions, and dividends. 

For income investors, it’s important to note the dividend has grown impressively by more than 20% annually since initiated in 2011.

Cisco currently yields 3.5% and has the cash flow and balance sheet strength to back these growing shareholder payments into the future.

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