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Why Cisco Systems Stock Gained 10% in February

By Andrés Cardenal – Mar 4, 2016 at 4:22PM

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Cisco is operating in a difficult environment, but cash flows and dividends are moving in the right direction.

IMAGE SOURCE: CISCO.

According to data provided by S&P Global Market Intelligence, shares of Cisco Systems (CSCO -0.74%) gained 10% during February. While the company is operating in a challenging environment, the recent earnings report from Cisco Systems give investors a reason to be optimistic.

Cisco delivers under difficult conditions
The economic slowdown in emerging markets, foreign currency headwinds, and weak corporate spending are dragging on Cisco's performance. Nevertheless, the company still managed to deliver sound numbers for the quarter ending Jan. 23.

Total revenue for the three month period came in at $11.8 billion, a year-over-year increase of 2%. This was at the top end of its guidance for an increase of between 0% and 2%. Product sales grew 2% during the quarter, while sales in the services division increased 3%.

Revenue from the switching business was the main weak spot in the report, declining by 4% due to by macro weakness in the campus business. The NGN routing division was a positive driver during the quarter, with revenue increasing by 5%. Collaboration revenue grew 3%, while the data center division showed a 3% decline in sales. Among the smaller segments, security was quite healthy, with an 11% increase in revenue during the quarter.

The business is looking good in terms of cash flows and earnings. Operating cash flow was $3.9 billion during the quarter, an annual increase of 36%. Adjusted earnings per share was $0.57, an increase of 8% year over year on the back of healthy profit margins and share buybacks reducing the amounts of shares outstanding. 

Cisco also announced a big dividend increase of 24%, boosting payments to $0.26 per share quarterly. At current prices, this represents a generous dividend yield of 3.9%. Management also announced a $15 billion increase to its share repurchase program, raising the remaining buyback authorization to $16.9 billion. The company is committed to returning 50% of free cash flow to shareholders on an annual basis.

Moving forward
Management is anticipating that normalized revenue will increase by between 1% and 4% in the coming quarter, so investors should not expect explosive growth from Cisco in the short term. On the other hand, as long as the company continues to produce solid profits and growing cash flows, it looks well positioned to keep delivering attractive returns for shareholders.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems. 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.

Stocks Mentioned

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$49.33 (-0.74%) $0.37

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