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Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. See last week's selection.
This week, I want to highlight networking giant Cisco Systems (Nasdaq: CSCO ) and show you why CEO John Chambers has his stock positioned to be a cash cow for your portfolio.
A spending slowdown? Not for Cisco!
If I didn't know any better, I'd have thought that Cisco was being set up to walk the plank. Save for a few bright notes from analysts, Wall Street had taken a decidedly negative tone on Cisco heading into its fourth-quarter report Wednesday night -- and with good reason. In the previous quarter, Cisco set a cautious tone with regard to its sales forecast, with many of its peers struggling to cope with weak demand and price competition among one another. Hewlett-Packard (NYSE: HPQ ) is shedding some 27,000 jobs to reduce its expenses, while Alcatel-Lucent (NYSE: ALU ) is scrambling to figure out a way to reverse years of losses and an underfunded pension plan.
But Cisco Systems is the leading networking company for a reason, and if you haven't heeded my pounding of the table to add Cisco to your Watchlist, perhaps its fourth-quarter report will provide the impetus to get up and make the move!
For the fourth quarter, Cisco reported a 4% increase in sales, but because of tight cost controls (including job cuts) and a reduced share count resulting from hefty share buybacks, it delivered a 56% year-over-year increase in net income. Much of the same worries that persisted in Europe are still present, but a lot of the near-term worries about enterprise growth in North America and Asia have dissipated. Cisco noted order growth in North America of 4%, with Asia's sales growth tripling North America's at 12%.
Cisco loves a "cloudy" forecast
The area that has me most intrigued, yet still accounts for a relatively small sum of Cisco's growth, is its data-center segment. According to Forrester Research, cloud computing will grow from being a $41 billion business in 2011 to $241 billion by 2020, so positioning itself for growth in the cloud and in big data transfers is a must for Cisco. It's done so by allying itself with hardware giant Intel (Nasdaq: INTC ) and has redesigned many of its cloud-capable servers around Intel's new line of chips. Cisco also continues to work side by side with BMC Software (Nasdaq: BMC ) in expanding its cloud-computing service capabilities. Although it's a small piece of the pie now, Cisco's cloud revenue grew by 90% in the fourth quarter.
Show me the money!
However, the real reason we're taking a look at Cisco today is its suddenly rapid dividend growth and how that could mean big bucks for you!
Cisco Systems isn't exactly highly regarded among the investing community for its roughly $32 billion in net cash and its propensity to buy back its own shares hand-over-fist. In fiscal 2012, Cisco spent $4.4 billion repurchasing 262 million of its outstanding shares, which produced around a $0.07 effect on its year-end earnings. Imagine if Cisco had instead paid out that $4.4 billion to shareholders? That would have been about $0.78 per share!
Cisco and John Chambers are attempting to rectify that animosity by pledging to return 50% of the company's free cash flow to shareholders in the form of a dividend and share repurchases. This move resulted in an immediate 75% boost to Cisco's dividend. The new quarterly payout of $0.14 is 133% higher than what investors were paid in January and puts the new projected yield at a delectable 2.9% after Thursday's 10% pop!
Furthermore, it's quite plausible that if Cisco were to cut out share buybacks altogether, Cisco's dividend would move dramatically higher. Cisco's average free cash flow from 2007 through 2011 was $9.33 billion, which would equate to an annual payout to shareholders of $0.87 per share at a 50% FCF payout rate. That would also place Cisco among tech's elite, with a yield around the mid-4% level.
Cisco's dividend boost not only gave its shareholders an early Christmas present, but it also boosted the tech sector beyond every other sector in the S&P 500 in terms of dividend payments. Cisco has all of the legacy tools to continue to dominate the switching and router market from the consumer and enterprise side of the business for years to come, but it's also made the proper investments and innovations to take advantage of the growing cloud-computing revolution. With a wide moat of cash and a growing dividend, Cisco is a great dividend stock you simply can't ignore.
If Forrester's figures are correct, you'd be foolish not to know the risks and rewards associated with cloud-computing companies. That's why our analysts have been combing through Intel's financial statements and earnings reports looking for the opportunities and pitfalls that could move this stock. In our latest premium research report on Intel, our analysts have presented their unbiased findings in the hope of giving you an investing edge. Get your premium report on Intel, which comes complete with updates for one year and costs less than a week's worth of coffee.