Is Cisco Doomed?

This is the end...
My only friend, the end.
Of our elaborate plans, the end.
Of everything that stands, the end.
No safety or surprise, the end.
I'll never look into your eyes, again.
-- The Doors, 1967

I've tried and tried, but ever since the news came out, I've been unable to get the tune out of my head. On Tuesday, Internet infrastructure superstar Cisco (Nasdaq: CSCO  ) announced that it's following in the footsteps of former tech stars Intel (Nasdaq: INTC  ) and Microsoft (Nasdaq: MSFT  ) and introducing a dividend for its shareholders.

A dividend? From Cisco? Is this the end?

I understand how many could think so, but my answer is: No, this is not the end for Cisco. In fact, it might just be the beginning of a beautiful relationship with shareholders.

Sure, once upon a time, Cisco's name was synonymous with "tech", and "growth." But lately, Cisco's been growing at a more modest pace -- in line with Intel and Microsoft, in fact, with analysts projecting only 12% growth over the next five years. And if that may not be the kind of pace that sets growth investors' pulses to racing, Cisco has at least evolved into the kind of company that attracts smiles from the value set. With $40 billion in cash on its balance sheet, and another $9 billion in cash pouring into its coffers each year, Cisco's biggest problem these days is figuring out what to do with the cash.

On the one hand, sure, Cisco could reinvest its profits in itself, in hopes of juicing its growth rate. But with a $124 billion in market cap already, I'm not sure how much bigger Cisco can grow. On the other hand, management could try to "buy growth" by acquiring other companies. Indeed, it has made a few savvy acquisitions recently.

But often as not, that path leads to madness. Witness Intel's absurd dabbling in code writing with the McAfee (NYSE: MFE  ) acquisition. Or Hewlett-Packard's (NYSE: HPQ  ) madcap acquisition spree. Or Dell's (Nasdaq: DELL  ) pale imitation thereof.

Foolish takeaway
For every Oracle (Nasdaq: ORCL  ) out there making divinely inspired moves in the M&A game, I can show you three more crying "synergies!" on the one hand, while savaging shareholder value on the other. Given my druthers, therefore, I prefer to see Cisco take the safer route. Dipping its toe in the water with a modest "1 percent to 2 percent" dividend is the right thing to do -- and a Foolish way to do it.

Fool contributor Rich Smith does not own shares of any company named above. Intel and Microsoft are Motley Fool Inside Value recommendations. The Fool has written calls (Bull Call Spread) on Cisco Systems. Motley Fool Options has recommended buying calls on Intel. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Intel, Microsoft, and Oracle.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (0) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1302095, ~/Articles/ArticleHandler.aspx, 10/1/2014 12:30:30 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement