Top Tech Doing the Right Things

08/22/2012 8:30 am EST

Focus: STOCKS

Some dominant tech stocks are still shaking off the heady days of the late 20th century, when triple digit P/Es were a sign of strength, not absurd valuations, but this one is getting through these sluggish times well, writes Paul McWilliams of Next Inning Technology Research.

Cisco Systems (CSCO) reported earnings a couple cents above the consensus, resulting in fiscal 2012 (ended July 2012) full-year non-GAAP earnings of $1.85; I had forecasted a one- to two-cent beat over the $1.83 consensus.

I think given CSCO's guidance, we'll see analysts increase fiscal year 2013 estimates from the current $1.91 to something closer to my previous $1.98 forecast—which I now think will prove to be at least a nickel too low (I'm upping my forecast to $2.03).

CSCO's report was very well aligned with expectations. While Europe remains weak and shows no signs that it will post a near-term recovery, and spending by the US Federal government isn't much better, other areas continue to spend.

When also given the fact that CSCO guided for year-over-year pro forma growth of about 3%, versus its competitors that forecasted lower year-over-year sales for calendar Q3, I think the evidence suggests CSCO is in fact taking market share.

An upside to my thinking is the fact CSCO stated it will boost its dividend from 8 cents per quarter to 14 cents. This pushes CSCO's dividend to roughly 3% at its current price, and is very welcome news.

CSCO is one of my favorite dividend-paying companies, and its commitment to use roughly 50% of its free cash flow (FCF) to pay dividends and buy back its stock on the open market is good news.

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