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Why Cisco Systems Stock Climbed 13.1% in 2018

By Keith Noonan - Updated Apr 18, 2019 at 4:51PM

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Momentum for the networking giant's growth business helped its stock handily outperform the market last year.

What happened

Cisco Systems (CSCO 1.55%) stock gained 13.1% in 2018, according to data from S&P Global Market Intelligence. The networking-hardware giant started the year off on a positive note thanks to catalysts from tax reform, and shareholders continued to see signs of successful execution as the company shifts to a new business model.

^SPX Chart

^SPX data by YCharts.

Cisco has been on an acquisitions spree in recent years, and the company closed out 2018 having made a slew of big new purchases including Accompany, Duo Security, and Luxtera. The focus on increasing recurring revenue streams through software is helping to fortify its router and switch businesses -- with hardware products being supplemented by new security, analytics, and infrastructure offerings.

A network of lines and points interconnected across the Earth.

Image source: Getty Images.

So what

The company gave shareholders reason to celebrate early in the year, announcing a 14% dividend increase and news that it had increased its share repurchase authorization by $25 billion. Cisco has long had a strong balance sheet, and the company appears to be leveraging it to greater extent after tax reform paved the way for increased financial flexibility.

In addition to returning cash to shareholders, the company has used the opportunities created by favorable tax reform to pursue acquisitions intended to power growth for the company's services, applications, and security businesses. The fruits of this ongoing transition have been evident in the company's recent earnings reports, with sales rising 8% year over year and adjusted earnings per share rising 23% compared to the prior-year period, operating cash flow rising an impressive 22%, and management guiding for solid growth to continue in the near term.

Now what

Cisco's leading position in network hardware and its expanding software ecosystem position the company to benefit from the growth of machine-to-machine connectivity in the coming years. The company could continue to evidence solid momentum as it ramps up new businesses and integrates acquisition targets that can aid in this pursuit.

Investors won't have to wait long to get their next in-depth look at the business and its transition progress. The company is scheduled to report second-quarter earnings after market close on Feb. 13. Cisco is guiding for revenue to grow between 5% and 6% year over year and adjusted earnings per share to increase roughly 14% at the midpoint of its target. Shares trade at roughly 14 times this year's expected earnings and yield roughly 3%.

Check out the latest Cisco Systems earnings call transcript.

Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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