As investors start heading toward the finish line in terms of their working years, some become overly cautious. But if you're in your 50s, you still have some time ahead of you to conservatively grow your portfolio.
Two tech mainstays, Cisco (CSCO -0.52%) and IBM (IBM -8.25%), aren't likely to take shareholders on a roller-coaster ride, though both offer substantial growth potential. Just as importantly, both Cisco and IBM are woefully undervalued compared to their peers, which helps limit downside risk. Each also pays a dividend yield near the top of their industry.
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Building a reliable foundation
Though its stock is up 23% so far in 2017, Cisco remains a bargain for investors with a bit of time on their side. CEO Chuck Robbins is in the midst of a transition away from old-school enterprise switches and routers to a focus on Infrastructure-as-a-Service (IaaS), cloud software solutions, and the Internet of Things (IoT).
While all of Cisco's target markets offer substantial upside, the emphasis is on slowly building a foundation of recurring revenue and becoming a more efficiently run company -- and it's working. Some pundits pointed to Cisco's 2% drop in revenue last quarter to $12.1 billion as a negative. However, that's short-term thinking and overlooks the strides Cisco is making in its transformation efforts.
The numbers that really matter -- recurring revenue and operating expenses -- tell a different story. An impressive 32% of sales, equal to $3.87 billion, are software and related sales that drive Cisco's recurring revenue. Making the shift to a reliable foundation of ongoing revenue was never going to happen overnight, which is why a lot of investors shunned Cisco earlier this year.
Thanks to its close eye on spending, Cisco's earnings per share didn't drop last quarter, staying flat year over year at $0.61. The $4.7 billion spent on operating expenses last quarter was a 7% decline compared to a year ago. Better still, Cisco's paring of overhead has become a continuing theme that will continue to benefit its bottom line.
Even with its recent stock price rally, Cisco trades at a meager 19.6 times trailing earnings and 15.4 times projected earnings. For some perspective, Cisco's peers are valued at an average of 36.1 times earnings. Let's also not forget Cisco's 3% dividend yield, which is well above the industry's 2.2% average payout.
Image source: IBM.
Steady as she goes
Much like Cisco, IBM is in the midst of transitioning away from legacy hardware and similar offerings. Instead, CEO Ginni Rometty has IBM laser-focused on burgeoning markets including the cloud, cognitive computing, data analytics and security, and mobile solutions.
IBM's "strategic imperatives" are the future, and they're gaining momentum with each passing quarter. The naysayers will point to IBM's lack of total revenue growth as a negative as last quarter's $19.2 billion was flat year over year, but that's a narrow-minded view given its transition initiative.
What some overlook is that 46% of IBM's total revenue last quarter, equal to $8.8 billion, was derived from its strategic imperatives segments. Over the past 12 months, IBM's annual cloud revenue run rate has skyrocketed to $15.8 billion, up 25% compared to a year ago. IBM's cloud revenue growth is crucial because it houses much of its analytics, security, and similar offerings.
Even as IBM invests in its strategic imperatives units with new data centers, divisions, and facilities, it has still managed to cut operating expenses 8% to $18.4 billion in 2017. A leaner, meaner IBM growing in areas that most pundits agree are markets with virtually limitless upside is a nice combination, one made even better by IBM stock's bargain-basement valuation.
The stock is down 7% so far in 2017. For investors in their 50s, IBM's lackluster performance in 2017 is actually great news. Similar to Cisco, IBM is valued so low right now -- 13 times earnings versus its peer average of 20 -- that its downside is minimal, not to mention that IBM's 3.8% dividend yield is well above the average of 2%.
With slow but steady progress in their transformations, industry-leading dividends, and minimal risk, Cisco and IBM warrant strong consideration for your portfolio if you're in your 50s.
