Among tech companies, Cisco Systems (NASDAQ:CSCO) has long stood among the upper echelons of the sector, with its networking equipment having revolutionized the use of the Internet. Along the way, Cisco learned that sharing its wealth with shareholders through dividends was a valid use of its capital, and recently, Cisco has managed to raise its dividend yield to enviable levels. But even as the rise of cloud computing has made the Internet more relevant than ever, Cisco has struggled to find its role in the ongoing evolution of technology, and dividend investors wonder if the fast growth they've seen in Cisco's payouts could come to an end soon. Let's look more closely at two things every dividend investor should know about Cisco Systems right now.
1. Cisco Systems has dramatically boosted its share buyback activity recently, rather than using spare cash flow to raise dividends even further.
Cisco doesn't just use dividends to return capital to shareholders. It has also been a long-term user of share repurchases, but since 2011, the amount of money Cisco had spent on buybacks has fallen even as its dividend payouts rose. This year, though, Cisco has returned to its buyback roots in a major way, with a whopping $7.5 billion in stock repurchases over the past 12 months.
It's hard to fault Cisco for favoring stock buybacks in the present environment. The stock's valuation is extremely cheap, as some investors have lost confidence in the company's ability to produce future growth and are therefore giving its shares a discounted earnings multiple. By reducing its share count, Cisco not only produces a boost to earnings per share, but also reduces the amount of money it spends on dividends overall, freeing up even more capital for use elsewhere.
Moreover, with double-digit percentage dividend growth in recent years, any further increase to Cisco's dividend could well look excessive. If Cisco's business starts to pick up, then its valuation might never look this attractive again -- and that will make Cisco's decision to emphasize stock buybacks look prescient in hindsight.
2. Restructuring efforts continue to be a headache for Cisco.
Cisco Systems has struggled to find a specific strategic direction to capture all the potential it has right now. Between the promise of cloud computing and the rise of the Internet of Things, Cisco has options that many others don't as it positions itself to keep providing connectivity equipment solutions while also developing the expertise to provide value-added services and high-margin software products to complement its hardware prowess. Yet with strong competition coming from multiple directions, Cisco has at times seemed lost about whether to stick with its traditional core networking business or to branch out in any of several other directions.
Some of the uncertainty has come out in specific decisions that Cisco has made. For instance, Cisco said in August that it would cut 6,000 jobs, representing the latest in multiple rounds of layoffs that included an 11,000 worker force reduction in 2011 and another 4,000 jobs cut last year. That generated negative sentiment about the company, even though Cisco has actually added jobs in other areas of its business that it sees as having higher potential for growth.
But the global market environment has also hindered Cisco in some cases. For instance, Cisco wants to build up its business in China, in which it has immense potential to help companies build out a solid Internet infrastructure. Yet geopolitical issues make China's relationship with the U.S. complex at best, and Cisco CEO John Chambers has said openly that controversies like the National Security Agency's spying activity overseas have directly hurt business prospects for Cisco and its peers.
Overall, Cisco remains a reasonable prospect for dividend investors, but it needs to make greater efforts to move forward with its turnaround. If it can, then Chambers may well be right in concluding that the worst is over for Cisco. Otherwise, though, Cisco could continue to see its share price languish despite its best efforts on the dividend front.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.