This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Is Cisco a Growth Stock or a Dividend Stock?

Stocks in this article: CSCO

NEW YORK ( F.A.S.T. Graphs) -- Cisco (CSCO) reported earnings and revenue that slightly exceeded analyst estimates while simultaneously offered guidance which was a little lighter than previous expectations.

Nevertheless, the stock is up by double-digits, which hardly seems justified by the news. Therefore, my logical mind tells me that the rise in Cisco's stock price has something other than a mild earnings and revenue beat behind it. Simple fundamental analysis of the company and its current valuation reveal what I believe to be the primary driving force behind today's price increase.

Let's start by looking at a F.A.S.T. Graphs, which plots earnings and dividends since calendar year 2003, the past decade. The orange line represents a PE ratio of 19.1, which is equal to the company's operating earnings growth rate. Moreover, it represents the earnings justified valuation based on applying a P/E ratio that is equal to the company's growth rate. The light blue shaded area shows dividends, which Cisco has been paying since 2011. Although there is some cyclicality in this record, long-term average defined Cisco as a growth stock.

Next, let's bring in monthly closing stock prices (the black line on the following graph) and analyze how the market has treated Cisco's earnings growth since 2003.

In theory, fair value exists when the black monthly closing stock price line is touching the orange earnings justified valuation line.

Notice how, from 2003 up to the great recession of 2008, Cisco's stock price became overvalued as the stock price rose above the orange line only to promptly fall back into alignment. Conversely, notice how the stock price moved back to the orange line after it initially fell during the great recession.

However, since fiscal year-end July 31, 2010, Cisco's stock price has fallen below its earnings justified valuation level based on growth since 2003. Interestingly, this is approximately one year before the company started paying their dividend as is expressed by the light blue shaded area on the graph.

A closer analysis reflects that Cisco's lower valuation since fiscal year-end July 31, 2010, can be attributed to a significant reduction or shift in the company's operating earnings growth rate over that period of time. Since the great recession of 2008, Cisco's operating earnings growth rate has averaged 7.2%.

This lower rate of growth implies a fair value PE ratio of 15, which is now represented by the orange line on this more recent history, which is below the PE of 19 that was justified when growth was much stronger.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

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.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

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.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,356.87 +288.00 1.69%
S&P 500 2,012.89 +40.15 2.04%
NASDAQ 4,644.3120 +96.4780 2.12%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs