4 Reasons to Buy Cisco Systems Inc. After Earnings

Networking giant Cisco Systems (CSCO -0.52%) is often considered a mature and low-growth tech company. However, its stock has risen 18% over the past 12 months and outpaced the NASDAQ's 14% gain. Its trailing P/E of 17 also remains significantly lower than the average P/E of 26 for the networking equipment industry.

Last quarter, Cisco beat analyst estimates on both the top and bottom lines. Revenue rose 3.6% annually to $12.8 billion, exceeding expectations by $150 million. Non-GAAP net income improved 6.2% to $3 billion, or $0.59 per share, beating estimates by three cents.

Cisco's 1800 series routers. Source: Cisco.

With a low valuation and solid earnings growth, is it time to buy Cisco? Let's take a look at four bullish reasons to buy the stock.

1. Product sales are bouncing back
Cisco's product sales returned to annual growth in fiscal 2015, compared to a disappointing decline in 2014. The overall weight of product sales on Cisco's top line also slightly decreased.

Source: Cisco earnings reports.

Nearly 60% of Cisco's product revenues last year came from NGN routers and switches. In fiscal 2015, router revenue rose 1% as switching revenue climbed 5%. Cisco attributed that growth to rising demand for high-end routers and new switches like the Nexus 9000. That turnaround was surprising since it faced fierce competition throughout the year from cheaper rivals like Huawei.

The remainder of Cisco's product revenues mostly came from collaboration, service provider video, data center, wireless, and security products. All of those segments -- except for service provider video -- posted positive growth in fiscal 2015.

2. Inorganic growth opportunities
New CEO Chuck Robbins intends to continue the aggressive M&A strategy of his predecessor, John Chambers. During last quarter's conference call, Robbins stated that "accelerating what's working and changing what's not" remained a top priority for Cisco.

Robbins highlighted Cisco's acquisitions of cybersecurity firm Sourcefire and mobile device management company Meraki as purchases that "worked" since both expanded Cisco's user base while growing its top line. Since May, Cisco has acquired (or agreed to acquire) five more companies -- cloud automation businesses Tropo, Piston Cloud Computing, and MaintenanceNet, and cloud security firms OpenDNS and Pawaa.

Cisco often bundles various hardware and software products together to marginalize competitors that offer fewer products and services. With $60 billion in cash at the end of last quarter, Cisco will likely beef up its portfolio with more acquisitions throughout fiscal 2016.

3. Bullish expectations
Robbins also stated that he was "very bullish" regarding the growth of Cisco's security portfolio, which can help it transition from hardware-only subscriptions to higher margin software-based ones. Cisco's security revenue rose 12% annually to $1.75 billion in 2015, but that accounted for less than 4% of its top line.

However, Cisco's growth in deferred revenue -- payments for products or services that haven't been delivered yet -- indicate that demand for new security services is rising. Last quarter, deferred product revenue rose 20% annually to $5.36 billion. After those products and services are delivered, deferred revenue becomes realized revenue, indicating investors can look forward to stronger sales growth in the future.

4. Healthy dividend growth
Cisco spent $8.3 billion, or 73% of its free cash flow, on buybacks and dividend payments in fiscal 2015. Cisco usually spends more of its cash on dividends than buybacks, and raised its dividend by double-digit percentages every year since introducing one in 2011. Its last dividend hike, announced in February, boosted its payout by 10.5%.

Cisco currently has a forward annual dividend yield of 2.9%, which tops the S&P 500's average yield of 2%. It's also higher than dividends from other "mature" tech stocks like Oracle and Microsoft, which have yields of 1.5% and 2.6%, respectively.

The bottom line
Cisco isn't an exciting growth stock. But with the markets getting choppier on various economic concerns, Cisco might serve as a nice anchor for your portfolio.

The stock is fundamentally cheap with decent dividends, and the company has reversed its decline in product sales. An aggressive M&A strategy can help Cisco diversify its portfolio away from routers and switches, while rising market demand for security products can help it pivot from hardware to software-based subscriptions.