Here’s why you should own Cisco Systems

The stock’s been around forever and it’s currently setting highs not seen for decades but there’s one main reason investors should be paying attention to Cisco Systems (Cisco Systems Stock Quote, Charts, News, Analysts, Financials NASDAQ:CSCO). According to portfolio manager Lorne Steinberg, it’s that the Cisco of today is quite different from the company we knew during the dot-com era, one which is much better suited to be a money-maker in the current climate.

“Cisco has evolved its business and they’ve become a major player in IT security, which every company will tell you is is unfortunately the fastest growing area out there,” said Steinberg, head of Lorne Steinberg Wealth Management, speaking on a BNN Bloomberg segment on Wednesday. 

“It used to be more of a commodity player in switches and the like. They still do that kind of thing but they really morphed their business to more value-added things, Software as a Service, etc., and they’re getting growth again for the first time and the stock is cheap,” he said.

“They’re a phenomenal share buybacks purchaser and dividend grower, with tons of free cash flow and really well run,” Steinberg said.

San Jose-based Cisco, which makes network and telecommunications hardware and software as well as handling domain security and connected tech, went through a restructuring a couple of years ago and just recently rejigged its business segments to better reflect a new set of priorities. The company is focusing on building up its recurring revenue, as witnessed in its latest quarter where annualized recurring revenue grew by ten per cent year-over-year to $21.6 billion as of Cisco’s fiscal first quarter 2022, delivered in November. (All figures in US dollars.)

For the Q1, Cisco hit $12.90 billion in total revenue, up eight per cent, but saw a 46 per cent rise in its Internet for the Future segment which accounted for $1.374 billion of quarterly revenue. Earnings per share grew by eight per cent to $0.82 per share.

“In Q1, we had robust growth and continued strong demand despite the very dynamic supply environment,” said Chuck Robbins, Chair and CEO, in a November 17 press release. “Cisco’s technology sits at the heart of the accelerated digital transformation happening today. Our breakthrough innovation, strong demand, and the success of our business transformation position us well for another year of growth in fiscal 2022.”

At the same time, the market initially reacted poorly to Cisco’s fiscal first, pulling the stock down about five per cent on the release. The top and bottom numbers came in under analysts’ estimates which on average had called for $12.98 billion in revenue and $0.82 per share. Management’s guidance for the full fiscal year was also below expectations at $3.38 to $3.45 per share in earnings on five to seven per cent revenue growth. Analysts had expected the outlook to be on average $3.42 per share and about 6.1 per cent in revenue growth, according to Refinitiv. 

But Cisco’s stock has been on fire since then, climbing almost 16 per cent in recent weeks. That puts CSCO currently in line for a 2021 return of 39 per cent which would be on top of a dividend currently paying a yield of 2.4 per cent. Overall, that’d be a much better result than 2020 where the stock dropped six per cent.

Steinberg said Cisco’s numbers show a company hitting a solid growth spurt.

“We’ve owned this company for the last 12 years,” he said. “[They have] phenomenal free cash flow, they’re number one in the world in their major businesses, they’re morphing their business into more recurring revenue and, finally, after flat revenues for the last few years, Cisco is delivering that five to six per cent revenue growth which should translate into eight to ten per cent bottom line growth.”

“And you’re going to see ten per cent-type dividend growth annually for the next number of years, so for us it’s a core holding. [It’s] a great business and not expensive,” Steinberg said.

Cisco, which categorizes its revenue by region, saw 15 per cent year-over-year growth for its fiscal first quarter coming from its Asia Pacific, Japan and China business, 11 per cent growth from Europe, the Middle East and Africa and just five per cent growth from its Americas business, which made up the lion’s share at $7.561 billion for the Q1. 

“Our teams executed well in a challenging environment, delivering balanced profitable growth with revenue and non-GAAP EPS both growing eight per cent year-over-year,” said Scott Herren, CFO, in the quarterly press release. “We also continued to make significant progress in our business model transformation. Remaining performance obligations and annualized recurring revenue both grew ten per cent year-over-year with product ARR growth of 21 per cent providing more predictability and visibility to our long-term growth.”