Balance Sheet Can Buffer Losses Until Acquisitions Bear Fruit
- By Sangara Narayanan
Cisco (CSCO), the bruised networking giant, has come a long way from the lows it reached in February. The stock is now showing a year-to-date return of nearly 9%, and its dividend yield of 3.52% is mouth-watering. In the first quarter of 2017 Cisco's revenues grew by 1% after being stuck at $49.2 billion in 2015 and 2016.
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The intrinsic value of CSCO
The problem for Cisco is that its core offerings of Switching and NGN Routing, both of which are infrastructure products, are being hit by the growth of the cloud industry. As third-party infrastructure management becomes more preferred than self-management, companies such as Cisco that build products for IT infrastructure are definitely going to be affected. Thankfully, due to Cisco's size and the quality of its products, the company has been able to hold its ground during a period when cloud growth was running above 50%.
But a huge question mark still hangs over Cisco's future.
The company realizes the need to build more diverse revenue streams that can capture this transformation and has made several moves in that direction.
"We acquired 12 companies during fiscal 2016 and have recently closed or announced our intent to acquire several more, enhancing our capabilities in the growth areas of security, collaboration, services and the Internet of Things (IoT) as well as in cloud, software and silicon." - Chuck Robbins, CEO of Cisco
It's still early for results, but the company clearly accepts the need to change and is ready to move in that direction - always a first good step.
At the end of the first quarter of the current fiscal Cisco had $8.58 billion in cash and another $62.38 billion in investments while long-term debt stood at $30.63 billion. Cisco's investment pile is more than enough to cover its entire $62.874 billion in liabilities. With a quarterly operating income of nearly $3 billion, this is a solid balance sheet that can withstand any trouble in the short to medium term.
During the first quarter of 2017 total dividend paid was $1.023 billion while net cash provided by operating activities was $2.73 billion. Cisco's payout ratio was 44.11% in 2016 and 45.4% in 2015. Clearly, there is plenty of room for Cisco to raise its dividends in the future, and there is plenty of strength in Cisco's balance sheet to keep paying dividends even if it has to face a revenue slowdown in the short term.
At the current yield, Cisco's balance sheet makes it an extremely attractive investment for the long run.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 5 Warning Sign with CSCO. Click here to check it out.
The intrinsic value of CSCO
