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Cisco: The Best Value In Tech?
10/24/2017 5:00 am EST
If you look around big tech, you won’t find a lot of yield for new dividend investors. Microsoft (MSFT) yields 2.3%, Apple (AAPL) yields 1.7%. Of course, Amazon.com (AMZN) and Alphabet (GOOGL) yields nothing, observes Ian Wyatt, editor of High Yield Wealth.
Cisco Systems (CSCO) is the lone holdout. Its shares are priced to yield 3.5%. The aforementioned four tech stocks have all posted 20%-or-more gains for 2017, while Cisco is up less than 5%.
The stock has yet to attract the love the other big tech companies have attracted. Cisco’s routing and switching businesses fail to ignite passions. Though the businesses generate an abundance of cash, they’re viewed as stodgy.
But Cisco is following Microsoft’s successful playbook of a few years ago; it’s taking the cash generated by a high-margin, no-growth business (in Microsoft’s case Windows and Office, in Cisco’s case routing and switching) and allocating it to growth business.
Cisco has made billion-dollar investments in new technology that show promise. Cisco’s wireless and security businesses grew revenue by 5% and 12%, respectively, over the first three quarters of the fiscal year.
Cisco has also invested heavily in its Internet of Things (IoT) business. IoT extends connectivity to appliances, automobiles, utilities, and other common devices. The potential is notable: Gartner, a market research firm, forecasts that connected devices will increase 400% to $20 billion by 2020.
Cisco has made several bolt-on IoT acquisitions. Earlier this year, it acquired software maker AppDynamics for $3.6 billion. AppDynamics’ software is used in financial services and retailing to boost companies’ corporate networks.
Cisco followed the AppDynamics acquisition with the $1.4 billion acquisition of Jasper Technologies, a device connectivity maker, for $1.4 billion.
Its acquisition strategy is fueled by its ability to generate an endless stream of cash (thanks to the stodgy routing and switching businesses). Cisco held $70.5 billion of cash and cash equivalents at the end of the latest quarter. It held $65.8 billion in cash and cash equivalents last year, and $60.4 billion in 2015.
Cisco might be the best value in tech today. The IoT, security, and cloud investments are all poised to lift Cisco’s growth profile (much like Microsoft’s cloud investments).
For now, investors are rewarded with the highest dividend yield among the big tech companies. Our suggested action is to buy Cisco Systems shares up to $35.
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