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Better Tech Dividend Stock: Cisco Systems vs. Texas Instruments

By Leo Sun – Dec 29, 2021 at 2:30AM

Key Points

  • Cisco and Texas Instruments have been largely resistant to inflation-related fears.
  • Both companies generate stable growth while returning plenty of cash to their investors.
  • But one of these blue chip stalwarts could have more upside potential than the other.

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Which blue-chip tech stock is the better overall investment?

Both Cisco Systems (CSCO 1.64%) and Texas Instruments (TXN 0.96%) are often considered mature tech stocks that are owned more for stability and income rather than aggressive growth.

However, Cisco and TI have both generated decent returns this year as inflation-related fears have gutted many higher-growth tech stocks. Cisco's stock has rallied over 40% this year, while TI's stock has risen nearly 20%.

Both tech giants are well-diversified, firmly profitable, and return a lot of their cash to shareholders through buybacks and dividends. Both stocks also trade at reasonable valuations. Those strengths make them the kind of tech stocks you want to own as rising inflation drives interest rates higher.

Chess pieces placed on stacks of coins.

Image source: Getty Images.

Let's look back at Cisco and TI's performance over the past year, and see which blue-chip stalwart is the better overall tech dividend stock for 2022.

The differences between Cisco and TI

Cisco is the world's largest supplier of networking switches and routers. It also provides wireless equipment, communications products, cybersecurity services, and other software applications. It frequently bundles together its hardware and software products to lock in its customers.

TI produces analog and embedded chips for the automotive, industrial, communications infrastructure, personal electronics, and enterprise systems markets. These chips aren't as powerful as CPUs or GPUs, but they're just as important because they support a device's power management, data transfer, and wireless features. 

Cisco anticipates a new era of growth

Cisco's revenue declined 5% in fiscal 2020, which ended last July, but its adjusted earnings per share (EPS) rose 4%. In fiscal 2021, its revenue inched up 1% but its adjusted EPS remained flat year-over-year.

Cisco attributed its tepid growth during this time to a cyclical slowdown in enterprise campus and data center upgrades (both before and during the pandemic), as well as its loss of contracts in China as the trade war evolved into a tech war.

Cisco's growth was throttled by supply chain constraints in the first quarter of fiscal 2022, but it still expects its revenue and adjusted EPS to both grow at a compound annual growth rate (CAGR) of 5%-7% between fiscal 2021 and 2025. It expects that new era of growth to be primarily driven by the expansion of its software and subscription services.

TI's pandemic-era headwinds are fading away

T!'s revenue rose less than 1% in fiscal 2020, which aligns with the calendar year, as the pandemic disrupted the industrial and auto markets, which together accounted for 57% of its top line. Nonetheless, tighter cost controls and buybacks still boosted its annual EPS by 14%.

This year, analysts expect TI's revenue and earnings to grow 24% and 37%, respectively, as the industrial and auto markets gradually recover. It will also likely benefit from stable smartphone sales, 5G network upgrades, and the expansion of the data center market to support more cloud-based services.

Next year, analysts expect TI's revenue and earnings to both rise about 4% as its year-over-year comparisons stabilize in a post-pandemic world. TI should also be well-insulated from the global chip shortage, since it manufactures its analog chips (76% of its revenue last quarter) at its own plants instead of outsourcing the production to third-party foundries.

The valuations, dividends, and buybacks

Cisco and TI both trade at reasonable valuations, pay decent dividends, and generate plenty of cash for consistent dividend hikes.

Cisco trades at 17 times forward earnings. It pays a forward dividend yield of 2.4%, and it's raised that payout every year since its initial payment in 2011. Over the past 12 months, it spent 44% of its free cash flow (FCF) on its dividend and another 17% on stock buybacks. It also reduced its total number of outstanding shares by 22% over the past 10 years.

TI trades at 23 times forward earnings. It pays a forward dividend yield of 2.5%, and it's raised that payout annually for 18 straight years. Over the past 12 months, it spent 53% of its FCF on dividends and 6% on buybacks. It's reduced its share count by 19% over the past decade.

The better buy right now: Cisco

I like both of these tech stocks as long-term investments, but Cisco is a slightly better investment than TI for three simple reasons: Its valuation is lower, its longer-term outlook is clearer, and it isn't as heavily exposed to the macro-sensitive industrial and auto markets.

Furthermore, Cisco's valuation is currently depressed by the supply chain constraints that have surfaced over the past year. Once Cisco resolves those issues, the pent-up demand for its products and services could propel its stock to fresh highs over the next few years.

Leo Sun owns Cisco Systems. The Motley Fool owns and recommends Texas Instruments. The Motley Fool has a disclosure policy.

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