DEAR MR. BERKO: What are your thoughts on Cisco Systems? I’ve bought 1,000 or more shares of Cisco at least 10 times in the past 10 years, sold them and made money each time. I am an insurance actuary and know enough to make trading decisions based on charts and trading volumes of some tech stocks I occasionally trade. Last month, one of my colleagues, who used to trade Cisco as I did, told me her son thinks it’s a very good long-term investment. Her son is a systems engineer and told her the stock could trade in the $50s or $60s in a couple of years. He claims that management is changing its business model so that Cisco can double earnings in the near future. She can’t explain this to me, and she doesn’t want me to talk to her son. I am in a quandary here and seek your advice. Should I keep trading the stock, or should I buy 1,000 shares for the long term? – NK, Rochester, Minn.
DEAR NK: Your colleague can’t explain Cisco to you. You can’t talk to her son. You’re in a quandary. Perhaps you ought to write to Ann Landers. However, the smart money suggests that Cisco may have some long-term appeal, so read on.
Cisco Systems (CSCO-$27), a $49 billion-revenue company, is a worldwide provider of internet protocol-based networking products, as well as service for the transmission of voice, data and video across local, metropolitan and wide area networks. CSCO’s Ethernet switches and routers are considered the gold standard by network and systems managers. CSCO’s carrier routers, used by cable and telecom companies to move data over long distances, are considered the best and most efficient in the market. And CSCO generates 50 percent more revenue per port than Hewlett-Packard, its largest competitor. These switches and routers account for 65 percent of revenues, while the remaining 35 percent of CSCO’s revenues derive from its fast-growing contiguous markets, such as security, unified communications, data center products and wireless. These sectors should grow by about 5 to 6 percent annually during the coming five years.
Perhaps one of the reasons for the son’s $60-a-share enthusiasm is CSCO’s intent to increase its service capabilities through product integration and software revenue. Service revenues grow faster and are less volatile and more dependable than product sales. CSCO’s impressive service margins exceed 65 percent. And because of Cisco Application Centric Infrastructure and the company’s intercloud initiatives, management’s decision to transition the company from a product and hardware seller to a software and solutions provider makes brilliant sense. This may also be the reason that Vanguard, Wellington Management, Dodge & Cox, BlackRock, State Street, Invesco and others recently reported owing hundreds of millions of shares. Gross margins of 65 percent, on growing revenues, are darn attractive on any income statement and could propel CSCO’s revenues, earnings and dividend growth.
Revenues for 2016 may come in at $50 billion, up a small billion from last year, while net income should be up 5 percent, to the $2.30/$2.35 level. And the all-important $1.04 dividend, which has enjoyed good growth and yields a swell 3.8 percent, could be raised annually as CSCO’s revenues and earnings improve this year and next. I don’t have to tell you that CSCO has an impressive $12 in cash per share, as well as a $12 book value. The company’s 20.8 percent profit margins and its 17.4 percent return on equity are equally impressive, as is its $61 billion of cash in the bank. Therefore, Citigroup, Jefferies, SunTrust, Merrill Lynch, Oppenheimer, Raymond James and Wells Fargo have “strong buy” recommendations on CSCO at the current price.
I’d also favor CSCO. In addition to liking the growing revenues and income, I’m high on the increasing dividend. During the past 40-plus years, I’ve always strongly emphasized dividend-yielding issues because dividends act as an investor’s cushions in a declining market. Heck, I don’t mind earning a 4 percent dividend for a couple of years while waiting for CSCO to reach its projected price. However, recognizing the volatility of the stock market, I’d place an open stop-loss order to buy CSCO at $24.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at email@example.com.