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Looking at Cisco for Your Portfolio

Its dividend is sustained by a payout ratio of only 22%, which creates an opportunity for more dividend increases in the quarters to come. With total cash as of April 27 of $47.39 billion and operating cash flow (TTM) of $12 billion, I'd anticipate Cisco's levered free cash to grow from its current $8.65 billion. That would provide more money to make investors happier.

Although year-over-year quarterly earnings growth in the first quarter of 2013 was nearly 15%, its year-over year quarterly service revenue growth was far less impressive at about 7%. Yet, in an interview with TheStreet's James Rogers CSCO CFO Frank Calderoni says that the long-term growth scenario remains strong.

Stephanie Link and Jim Cramer commented today about CSCO, which is part of the ActionAlertsPLUS portfolio. After CEO John Chambers' optimistic remarks during the recent earnings call, "Cisco painted a different picture, with clear progress in its transition from being a commodity-oriented routers/switching company to one that is based on IT solutions and offers more services, software and security components," they said.

What's not to love about a company with critically needed products and services that's selling at slightly above 11 times forward (one-year) earnings? With a five-year expected price-to-earnings-to-growth (PEG) ratio of only 1.4 and an operating margin (TTM) of 23%, CSCO shares still have room to run.

As Cramer and Link pointed out, "Cisco is well positioned for the ongoing 10G upgrade cycle and better trends in the service provider vertical. The next catalyst will be its analyst meeting, where we expect to hear more about the execution of its new strategy and its market-share gains. The stock trades at 10x 2013 earnings and 7x 2014 earnings, carries a 3.2% dividend yield and has $5.78 a share in net cash -- very attractive for a company that is No. 1 in its field. It has impressive execution, offers new products and is transitioning to a more reliable business model."

Can the share price cool down a little more first? Of course, but don't count on a big correction either. It's not rocket science but common sense suggests that after a stock has moved 20% higher in 10 days it's due for a partial pullback.

At $23 per share the dividend yield-to-price moves up to almost 3% which should help put a floor underneath the stock. Of course anything could happen including an overall stock market correction which could cause all the "ships in the harbor" to go down as the tide goes out.

As we anticipate some kind of overdue stock market correction (which may or may not come soon) now's a good time to trim our portfolios and do some rebalancing and planning. How many stocks do we want to own and which ones do we want to add to if the tide goes out and our equity "ships" go down?

If you're going to take a bigger position in certain stocks make sure they have a great track record when it comes to return on invested capital, sales growth during most economic seasons, having plenty of total cash and a shareholder-friendly leadership that rewards investor's faith and patience. Cisco Systems and its CEO would make the cut and meet that description with room to spare.

At the time of publication the author is long CSCO.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
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