Once upon a time, tech stocks were hot. They eventually crashed back to earth, only to rise again and lead this bull market.
The survivors of the dot-com era clearly did something right, and Cisco Systems (Nasdaq: CSCO) is a great example.
While shares trade much lower than the March 2000 high of $82, the stock has come a long way from the October 2002 low of $8.12. During that comeback, the company has made itself stronger, has become essential for making the internet work the way it does, and has become a powerful income stock in the process.
It's probably hard to find an investor who hasn't heard about Cisco -- and yet, many people don't know what, exactly, Cisco does.
I think there are a couple reasons for that gap. One is the highly technical nature of Cisco's business. The other is the wide variety of products and services Cisco makes. But all of its products, all of its services, all of the changes Cisco went through over the years, they all have something in common: They all connect people.
And because the world is becoming even more interconnected, Cisco's work is never finished. The company builds products that make various networks work faster, data centers and the cloud function seamlessly, it makes the Internet of Things (IoT) possible, and helps incorporate security in all these operations.
Strange Disappearance Of 23,971,353,493 U.S. Dollars
Cisco: Then And Now
It all started at Stanford University, when husband and wife Len Bosack and Sandy Lerner, who cofounded the company in 1984, wanted to create something that would allow them to communicate faster from their offices located in different buildings. As a result, a new technology -- the multi-protocol router -- was born.
Cisco is still known for its routers (which represent about 15% of the business). It also makes switches (30% of the business) and provides services (24%), collaboration software (9%), on-demand infrastructure for data centers (7%), video products for service providers and wireless (5% each) as well as security services (4%).
When the current CEO, Chuck Robbins, was promoted to this role about two years ago, the market was surprised. After all, he was replacing industry legend John Chambers, who had been with the company since 1995.
Cisco's quarterly dividends have also been growing: The dividend currently sits at $0.29 per share, which is up from $0.19 per share in December 2014, and $0.21 per share in 2015.
That kind of growth is impressive, especially if you recall that, as recently as 2010, Cisco was paying nothing. And that its first dividend, paid in April of 2011, was only $0.06 per share. Of course, for Cisco to transform from a once high-flying tech darling to a solid company paying ever-rising dividends, there were a few changes along the way.
First, Cisco is no longer an aggressive growth company, which means much of the risk associated with investing in early technology is gone. Most of its products are necessities, no longer experiments or luxuries. And while there is competition, the Cisco brand carries a stamp of quality that allows it to either charge premium prices or sell the products easier than many of its smaller competitors.
Of course, the flip side is that Cisco is no longer growing at a double-digit pace. The projected earnings growth for the next few years is "only" 7.4%.
But this lower number is already reflected in the stock's valuation: Shares trade at an attractive 16 times expected earnings. This valuation will seem even cheaper after subtracting the significant amount of cash that the company has accumulated on the balance sheet (almost $68 billion in cash and equivalent as of April 29 -- or, net of long-term debt, $35.5 billion).
And this valuation has now become almost irresistible, thanks to the recent sell-off. Investors didn't like the guidance Cisco provided after it reported a solid third quarter on May 17, and sent shares down some 7%.
Some of the concerns are related to lower U.S. Federal spending, which is likely to recover over the longer term. Business with Mexico seems to be significantly down, but that should also normalize after a period of adjustment.
On the bright side, Cisco is becoming a major internet security player, and its security business (up 10% year-over-year) continued to grow much faster than the rest of its divisions.
New CEO Chuck Robbins has been emphasizing mergers and acquisitions, and much of that M&A activity fell to information security companies. In the past few years, Cisco has acquired several computer and internet security firms, including a $2.7 billion Sourcefire deal in 2013 and smaller deals for OpenDNS, Pawaa, Lancope and more.
Plus, ongoing restructuring should continue to generate cost savings and other benefits. In the latest quarter, Cisco announced that the restructuring first announced in August 2016 will continue.
Back in August, the company said that it would cut approximately 5,500 jobs (about 7% of the workforce). Now, it is adding about 1,000 people more to that cut. Cisco plans to invest the savings in the business in addition to shifting resources between business areas. The areas where Cisco plans to invest further are such key areas as security, IoT, collaboration, next-generation data centers and the cloud.
Cisco Is A Long-Term Buy For Income Investors
With a steady business, Cisco remains firmly committed to returning 50% or more of its free cash flow to shareholders. Attractively valued and yielding 3.67%, Cisco is a long-term buy. That's why I recently added it to the portfolio of my premium newsletter, The Daily Paycheck.
But Cisco is just one of many, many securities my subscribers use to earn an extra $1,543, $2,184, or even $4,200 each month. By owning a diverse swath of high-yielders, steady yielders and fast-growing dividend payers (like Cisco), we've created an "idiot-proof" system that proves everyday investors can beat Wall Street at their own game. Click here for my special report that shows you how to get started.