Two of the most popular strategies for investing during retirement -- or any time, for that matter -- are growth and income. Those who favor the first will seek companies that are positioned for rapid revenue and earnings gains, and the rising share prices those can bring. Seekers of the second will want the promise of steady, stable and lucrative dividends. But some stocks offer both, and tech behemoths Cisco (NASDAQ:CSCO) and IBM (NYSE:IBM) are two that immediately leap to mind in that category.
Though they play in slightly different tech sandboxes, they share a number of attributes. Both are in the midst of sweeping transformations. In Cisco's case, CEO Chuck Robbins has focused his company on cloud infrastructure-as-a-service (IaaS), software, and the Internet of Things (IoT). IBM is engaging in a major shift away from its legacy hardware solutions and toward offerings for cutting-edge markets.
As an added benefit for their shareholders, Cisco and IBM both pay industry-leading dividends.
Bring on 2018
Despite Cisco's 2% decline in revenue last quarter to $12.1 billion, its report clearly showed that it has rounded the transition corner and is on course for a stellar 2018. Deferred revenue -- an indicator of what it can expect to take in during the months ahead -- rose 10% to $18.6 billion in the first quarter of Cisco's fiscal 2018. The better news is how it was able to grow deferred revenue so dramatically.
Deferred product revenue, "driven largely by subscription-based and software offers," soared 16% last quarter. That's a critical component of Cisco's plans in that subscriptions and software generate recurring revenue. Along with growing the IaaS business and keeping tabs on spending, finding the right formula to generate recurring revenue has been a focus for Robbins over the past couple of years. And it's working.
Of last quarter's $12.1 billion in total sales, $3.87 billion (32%) was generated from stable, recurring revenue. The revenue foundation Cisco is building climbed three percentage points compared to last year, and continues to rise with each passing quarter.
Cisco's emphasis on cutting overhead was evident from its drop in sales-related expenses, as well as its overall decline in spending. At $4.67 billion, its quarterly operating expenses were down 7% compared to a year ago. The end result was a 4% increase in earnings per share to $0.48, up from $0.46 per share last year.
Another attribute Cisco shares with IBM beyond its strong 2.9% dividend yield is that it's woefully undervalued. Trading at a mere 20.6 times earnings, Cisco stock is priced well below its peer average of nearly 34 times. Not only does Cisco's relative value give it a significant potential upside, it also limits its downside risk, which is an added benefit for retirees and other conservative investors.
Rounding the corner
Much has been made of IBM's five-year-plus long streak of revenue-losing quarters. Last quarter's $19.2 billion in revenues was flat year over year, which helped ease some of the angst pundits and investors had been feeling. A recent upgrade of IBM's stock to outperform and an increased target price of $180 a share is confirmation that some analysts are finally coming around.
A shift as significant as IBM's move away from hardware and toward its "strategic imperatives" businesses -- which include the cloud, data analytics, security, and mobile -- is a time-consuming process. But it appears the time is ripe for IBM shareholders to reap the benefits of CEO Ginni Rometty's efforts.
IBM may not be at the top of the cloud heap, but its annual cloud run-rate of $15.8 billion as of last quarter places it rarefied company. In the third quarter alone, its cloud sales climbed 20% to $4.1 billion; combined, its strategic imperatives units generated $8.8 billion. In other words, 46% of IBM's total revenue is now derived from those up-and-coming businesses.
As IBM nears its objective of top-line growth, it's also delivering on its cost-cutting initiative. In the first nine months of 2017, IBM pared 8% off its operating expenses. Considering its strategic imperatives push, not to mention other burgeoning opportunities including IoT, blockchain, and quantum computing, the fact it has a firm grasp on spending as well is impressive.
At 13.6 times trailing earnings, IBM is priced well below its peer's average of 21.4. Just as eye opening is its stellar dividend payout, which with a current yield of 3.6% is nearly twice the average of its peers. Minimal risk, growth potential, and strong dividends make both Cisco and IBM ideal investments for retirees.