After last Wednesday's close, Cisco (CSCO) came through with a surprise in its quarterly earnings call -- but not its usual disappointing-outlook-after-a-modest-beat variety.
The big news was a 75% dividend increase, after just initiating a dividend at the beginning of last year. Cumulatively, the dividend has been increased 133% in just six quarters. Cisco's financial resources are immense, with almost $49 billion in cash. Shareholders have been pushing the company to share this wealth, but the company had been using its reluctance to do so to advance its political desire for a tax holiday on repatriated foreign earnings.
Finally, the company and the board got the message. In May, I suggested that a move to a 3% dividend yield would boost the stock price; the new dividend level on the stock price prior to the earnings report produced a 3.23% yield. The stock responded the next day by moving up almost 10%.
There's more: CEO John Chambers committed to paying out 50% of free cash flow in dividends and share repurchases going forward.Cisco's earnings results were also good. Revenue exceeded consensus estimates and earnings per share beat by $0.01. This is meaningful because expectations had moved up in the days before the call, yet the company's performance still impressed. There continued to be lingering weakness in sales in Europe, to the U.S. federal government, and video-for-service providers (cable and telephone companies). Conversely, U.S. large-enterprise demand, sales in the Asia-Pacific/Japan/China, and data center products were better than expected. In total, the book-to-bill ratio was "comfortably" above 1, one indicator that future business may be recovering overall. Importantly, the tone of the commentary by Chambers on the call was reasonably confident, which did not deflate the positive expectations spawned by the favorable earnings and revenue figures. This could be the beginning of a resurgence for Cisco: business seems to be improving and corporate earnings growth is adequate, even with pockets of weakness in some products and geographies. And thankfully, the company has finally gotten the message about boosting shareholder returns. At the current price, the stock is still very cheap at just 9.9x estimated earnings for the new fiscal year, or 6.7x adjusted for $6 per share in net cash. As I said in May, its industry still has lots of long-term growth potential, as data and video traffic continue to increase dramatically worldwide. And now there's an attractive dividend yield to go with the persistent share repurchase.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV