Cisco Systems (CSCO) — the world’s largest provider of high-performance computer networking equipment — designs and sells a broad range of technologies that power the Internet, notes Ingrid Hendershot, money manager and editor of Hendershot Investments.
Cisco Systems was founded in 1984 by a group of computer scientists at Stanford University. Since inception, Cisco has shaped the future of the Internet and has become the worldwide market leader in networking with sales topping $51.5 billion in fiscal 2022.
Amid robust competition and a rapidly changing technological landscape, Cisco is transforming its offerings to meet the evolving needs of its clients. This transformation, which is progressing well, includes shifting the business from selling network switches and routers to more software and subscriptions. During the first quarter of fiscal 2023, 43% of Cisco’s revenue was derived from recurring software and services.
Cisco’s strong free cash flow has enabled it to provide generous cash returns to shareholders while making investments to capitalize on long-term megatrends like hybrid cloud and work, security, the Internet of Things, high-speed ethernet, 5G, and WiFi 6. In fiscal 2022, Cisco generated $12.8 billion in free cash flow, representing more than 100% of reported earnings, a sign of high-quality earnings.
During the past five years, Cisco has repurchased nearly $52 billion of its shares, thereby reducing its share count by 11%, while investing nearly $13 billion in acquisitions to fuel growth. In fiscal 2022, the company increased its dividend for the 11th consecutive year and remains committed to returning at least 50% of free cash flow to shareholders annually even as it transforms the business.
Deducting its copious cash from its stock market capitalization, Cisco trades at an attractive valuation of just over fifteen times trailing earnings with a generous 3.2% dividend yield. Long-term investors should seek to network with Cisco Systems, a high quality market leader with strong free cash flows, a substantial share repurchase program and an attractive dividend yield.