Cisco Systems, Inc.: CSCO Stock a Unlikely Dividend Growth Stock
July 27, 2017
CSCO Stock Is Yielding Nearly Double the Average Dividend Yield
Income investors typically stay away from the technology sector because businesses within it often don’t pay a dividend and focus entirely on internal growth. The industry is also very prone to rapid change, requiring companies to reinvest in the business to compete and stay relevant. This keeps the cash flow of the business within the company and only growth investors participating in the upside. However, I have found a great technology stock that offers the best of worlds.
Cisco Systems, Inc. (NASDAQ:CSCO) is a large-cap growth technology company. And as a tech stock that pays out a quarterly dividend, CSCO stock is a very rare one indeed.
Even though there is often change in the technology sector, Cisco enjoys recurring and predictable revenue. This is because the company has long-term deals in place with companies around the world. Most reinvesting in the business is done more to upgrade infrastructure than anything, meaning core assets do not see much change.
A Growing Company
Over the past five years, Cisco has reported top-line of revenue of $46.0 billion or more. Part of this revenue has been allocated towards the acquisition of other companies, with a minimum of three purchased every year over the same five-year period. The reason why money is deployed into purchasing new services and products is because it is a more efficient use of capital than doing this stuff in-house.
For instance, in October of 2013, Cisco acquired Sourcefire, an intelligent cyber solutions company. Sourcefire complements the current security portfolio and will provide more secure service options to those companies that turn to Cisco for data services. This move will also save costs and help maintain customer trust and satisfaction. (Source: “Cisco Announces Agreement to Acquire Sourcefire,.” Cisco Systems, Inc., July 23, 2013.)
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More recently, in 2016, the company acquired Jasper Technologies, a source of cloud-based “Internet of Things” (IoT) software. This enables more users around the world to use the platform to launch and mange IoT services, as well as further diversifies Cisco’s offerings. Jasper also keeps Cisco is the race with other companies involved in the IoT, including Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL). (Source “Cisco Completes Jasper Acquisition,” Cisco Systems, Inc., March 22, 2016.)
Get Paid from a Technology Company
Cisco stock pays out a current annual dividend of $1.16, with at least one increase every year for the past six years. The dividend policy is normally reviewed every February. The dividend represents slightly over half of the revenue that is generated from the business operations. This is possible because of the steadiness of the revenue. The growth in the payout is coming from the growing revenue from the acquisitions and the core assets.
The dividend can continue to see growth because the company has about $65.0 billion sitting in cash. This means affordability is not an issue; unlike other dividend-paying companies, there is no need to use debt to fund the dividend. Another possibility is seeing a special dividend, a one-time payment given to shareholders using the cash position. (Source: “Cisco Systems Inc.,” MarketWatch, last accessed July 24, 2017.)
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Final Thoughts About CSCO Stock
The most important aspect of any investment is the possibility of growing the investment capital over time. Cisco ensures this by acquiring companies to strengthen its portfolio of assets. All the while, shareholders receive income, an amount that has been on the rise.
As of this writing, CSCO stock is offering a dividend yield of 3.65%, which is almost double the 1.88% average dividend yield of the companies on the S&P 500 Index—the largest companies that trade on a major U.S. exchange.
