Please ensure Javascript is enabled for purposes of website accessibility

Is Cisco Systems' Dividend Sustainable?

By Palbir Nijjar - May 17, 2016 at 7:18PM

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

The tech bellwether is distributing more of its earnings to shareholders. Can it last?

Image source: Cisco Systems.

Networking giant Cisco Systems (CSCO -0.41%) has been a bit of an underperformer over the past year. The stock has fallen about 9% compared with the S&P 500, which has dropped 2%. Although the stock has struggled, the business performance has been better.

Over the 12 months ended in late January, when Cisco last reported earnings, the company has been able to grow revenue a little over 3% and take much more of that growth to the bottom line. Earnings per share grew nearly 22% over the same period. Return on equity came in at an impressive 17.3%.

The company's five-year performance hasn't been too shabby, either. Revenue and EPS have grown an annualized 4.2% and 5.6%, respectively. The stock has more or less mimicked the S&P 500's returns, increasing 50% over the past five years. It's not knock-it-out-of-the-ballpark performance, but the slow and steady progress has allowed the company to increase its annualized dividend from $0.12 per share in 2011 to $1.04 today.

An increasing dividend coupled with a falling stock price has resulted in a stock that is paying a 3.9% dividend yield as of this writing. While this may be impressive, it is also worrisome at first glance. As the dividend yield creeps up to 4%, it would be prudent to analyze if Cisco's payout is sustainable.

Payout ratios

The simplest way to measure if a dividend is in danger of being cut is to compare the payout amount to the amount of money the company made. As the dividend payout ratio increases, the less money the business retains to fund operations or invest in itself.

CSCO Payout Ratio (TTM) Chart

CSCO Payout Ratio (TTM) data by YCharts

Since Cisco implemented a dividend in 2011, the proportion of its earnings paid out to shareholders steadily increased before slightly declining again this last year. Despite the increase, a dividend payout ratio of 41% is still reasonable for a company like Cisco. Technology peer Intel (INTC 1.05%), for example, has a payout ratio of 44%.

One flaw with the dividend payout ratio is that the metric compares dividends to earnings. Earnings can have a lot of noise that doesn't directly affect the true earnings power of the company. This noise includes depreciation, share-based compensation, and one-time charges. When comparing dividends paid to free cash flow, Cisco's payout ratio decreases to 34%, well in line with some of its peers.


Free Cash Flow (TTM)

Dividends Paid (TTM)

Dividend-to-FCF Ratio

Apple (AAPL -1.31%)

$55.17 billion

$11.89 billion


Microsoft (MSFT -0.82%)

$23.65 billion

$10.68 billion



$12.61 billion

$4.27 billion



$11.89 billion

$4.65 billion


Source: YCharts.

Balance sheet

A strong balance sheet can also help a company navigate through choppy waters and a strong cash position with manageable debt levels should safeguard investors from a dividend cut.

As of the end of its most recent quarter, Cisco's cash balance exceeded $60 billion. Current liabilities, which are payments expected to be paid out within the next year, were only $23 billion. When looking at both short-term and long-term obligations, Cisco has done a tremendous job maintaining a strong financial position.







Most recent

Quick ratio







Long-term debt-to-equity







Source: author's calculations using company data.

The quick ratio basically tells investors that the company has over 3 times the liquid assets to cover its current obligations to outside parties. With only a third of its capital structure in debt and a strong quick ratio, signs suggest that Cisco has a strong enough balance sheet to weather most storms.

Bottom line

In this low-rate environment where investment income is difficult to come by, Cisco Systems may be an attractive opportunity for investors. The company has consistently increased its dividend while delivering solid business performance. The balance sheet is strong, with a cash balance that leaves room for the company to not only explore growth opportunities but also increase future payouts.

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.
$42.70 (-0.41%) $0.17
Microsoft Corporation Stock Quote
Microsoft Corporation
$258.12 (-0.82%) $-2.14
Apple Inc. Stock Quote
Apple Inc.
$137.41 (-1.31%) $-1.82
Intel Corporation Stock Quote
Intel Corporation
$37.68 (1.05%) $0.39

*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
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

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.