Please ensure Javascript is enabled for purposes of website accessibility

Will Cisco Systems, Inc. Raise Its Dividend in 2016?

By Leo Sun - Jan 16, 2016 at 10:12AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Can the networking giant keep rewarding shareholders with big dividend hikes?

Many investors consider networking giant Cisco (CSCO 6.96%) to be a dull, slow-growth tech stock that pays a decent dividend. The stock currently yields 3.4%, which is considerably higher than the S&P 500's 2.3%. But looking ahead, can investors count on Cisco to raise its dividend in 2016 and beyond?

Source: Cisco.

How Cisco stacks up against its peers
Cisco's closest direct competitor, Juniper Networks (JNPR 2.88%), only has a dividend yield of 1.5%. Over the past 12 months, Cisco paid out 36% of its free cash flow as dividends, while Juniper only paid out 19%.

That might seem like Cisco is more "generous," but it also means that Juniper has more room to grow its dividend. Yet over the past five years, Cisco's trailing 12-month free cash flow has risen 26%, outpacing Juniper's choppier 12% growth. 

CSCO Free Cash Flow (TTM) Chart

Source: YCharts

Last quarter, Cisco returned $2.3 billion (91% of its free cash flow) to shareholders by spending $1.2 billion on share buybacks and $1.1 billion on dividends. CFO Kelly Kramer noted that was "more than consistent" with its commitment to "returning a minimum of 50% of our free cash flow annually."

Cisco started paying a quarterly dividend in 2011 and has raised it every year since. On an EPS basis, Cisco paid out 44% of its earnings per share as dividends over the past 12 months. Last year, Cisco raised the dividend 10.5% to $0.21 per share. However, that was notably lower than its 11.8% hike in 2014, 21.4% hike in 2013, and 75% increase in 2012. Juniper, by comparison, hasn't raised its dividend since rolling it out in 2014.

Bottom line headwinds
For Cisco to continue raising dividends, its bottom-line growth needs to stay on track. Analysts expect Cisco to grow its annual earnings per share at just 9.4% over the next five years, which is lower than the industry average growth rate of 15.7%. If Cisco achieves 9.4% earnings growth this year and retains an EPS-based payout ratio of 40%, investors can expect the company to raise its quarterly dividend 9.5% to $0.23 for 2016.

Cisco is currently pivoting its business from low-margin networking hardware toward high-margin software and services. The bulls believe that Cisco can bundle together software services with its networking hardware to expand into higher growth markets like cybersecurity. The stock's 11% decline over the past 12 months has also boosted its yield to an all-time high, indicating that it might be an ideal time to buy Cisco as an income investment. The stock also trades at just 13 times trailing earnings, a considerable discount to the industry average P/E of 42 for the networking and communication devices industry.

CSCO Dividend Yield (TTM) Chart

Source: YCharts

The bears believe that a paradigm shift toward cloud-based networking solutions, which reduce the need for traditional networking hardware, will throttle Cisco's growth. This shift contributed to a 3% annual decline in enterprise revenue and an 8% drop in routing revenue last quarter. Credit Suisse analyst Kulbinder Garcha recently warned that SDN (software-defined networking) platforms will simplify networking, reduce demand for Cisco's networking equipment, and "shrink gross profit dollars for the networking stack."

Meanwhile, stiff competition from Chinese hardware manufacturers like Huawei and ZTE could force Cisco to lower prices to stay competitive. Moreover, Cisco expects a strong dollar to take a big bite out of its overseas earnings for the foreseeable future.

Despite these challenges, Cisco's gross margins remain comfortably above 60%, indicating that these headwinds won't dent its dividend growth anytime soon.

Why Cisco will raise its dividend
Based on Cisco's healthy free cash flow growth and positive earnings growth, I believe that Cisco will raise its dividend in 2016. But considering that its dividend hikes have been declining as its annual earnings growth remains in the single digits, it's likely that Cisco will hike its dividend less than it did in previous years. Nonetheless, Cisco still offers one of the best yields among mature tech stocks, which could prove valuable in riding out today's volatile markets.

 

Leo Sun 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$49.91 (6.96%) $3.25
Juniper Networks, Inc. Stock Quote
Juniper Networks, Inc.
JNPR
$29.65 (2.88%) $0.83

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
395%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.