With Dividend Hike, Cisco Evolves from Sexy to Safe

With Dividend Hike, Cisco Evolves from Sexy to Safe

iStockphoto/The Fiscal Times

Better late than never. It has been less than 18 months since Cisco Systems (CSCO) began paying out some of its cash mountain, now nearly $50 billion, in the form of dividends. But on Wednesday, the networking giant announced a dividend hike that brings its total quarterly payout to more than double the 6 cents a share it started at in early 2011.

Cisco investors have been grumbling and griping about the company’s chintzy approach to paying dividends, and the reluctance of the company’s management team to even discuss the matter frankly. Even activist Ralph Nader took to his bully pulpit as a Cisco shareholder, arguing in favor of a dividend of least 50 cents a share a year – plus a $1 special dividend, to help chip away at Cisco’s hefty cash position. Investors didn’t get the special dividend. But going forward, they will be collecting 14 cents a share every quarter.

That’s good news on a number of fronts. Firstly, it boosts the yield on Cisco’s shares, making them attractive to a greater number of investors; some of the benefits of that likely are now priced in, thanks to the 4.8 percent jump in the company’s share price in after-hours trading. More significantly, it tells the world that Cisco CEO John Chambers wasn’t just mouthing platitudes when he said following the release of the company’s earnings yesterday that an uptick in orders at the end of the company’s just-completed quarter is a positive sign of things to come. Europe may remain weak, he commented, but the market in the U.S. appears to be improving.

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Cisco had been wary of putting in place a regular dividend in the first place, much less raising it to levels many investors felt was acceptable. That wariness could well have had to do with the company’s perception of the business environment; to the extent that a company is worried about a downturn, the last thing a prudent CEO will do is boost a company’s quarterly dividend payout. Dividends are easy and popular to put in place; once implemented, however, they are difficult to trim or cut back without conveying a message to the market that the company is under strong financial pressure. And just three months ago, Chambers had underwhelmed analysts with his cautious outlook for the company’s fiscal fourth quarter.

So Cisco’s larger dividend also can be interpreted as a sign that the company’s earnings strength – Wednesday’s report featured a 56 percent growth in net income, higher revenues and lower operating expenses – may continue into the coming quarters.

The flip side, of course, is that the higher dividend payout also signifies an end – for anyone who hasn’t been paying attention – to the idea that Cisco is still a high-growth stock. Back in the 1990s and into the last decade, it was one of those technology companies that formed the bedrock of an investor’s growth stock portfolio. Acquisitive and innovative, Cisco was in the vanguard of the tech stock boom and generated healthy double-digit gains in earnings.

But as has happened before and will continue to happen, Cisco became a victim of its own success. Behemoth companies simply find it harder to move the dial and continue to grow as such a feverish pace. The constantly changing nature of technology makes that still harder. More recently, Cisco has again narrowed its focus, and has nearly completed a business overhaul that involved laying off thousands of workers. That was bad news for those workers and for the jobs market but – as seen in this quarter’s earnings news – good news for Cisco’s bottom line and for investors. Going forward, Cisco pledged to return at least half of the free cash flow it generates each quarter to investors in the form of either dividends or share buybacks.

Don’t look for big special dividends or more hefty increases in the quarterly payout – that’s not Cisco’s style. Historically, the company has preferred to use buybacks, even though most of those haven’t really helped in the stated objective of boosting shareholder value. (Cisco shares have traded at around $15.50 this summer, well off their 52-week high of $21.30.)

Cisco appears to have shifted from being a growth stock to being a value play, its higher dividend coupled with the probability of single-digit gains in revenue for its fiscal first quarter.

Many of the tech sector’s most familiar companies have followed a similar dividend-boosting path. Of the 71 information technology companies in the Standard & Poor’s 500-stock index, 41 now pay a dividend, according to S&P analyst Howard Silverblatt. The average yield of those dividend-paying tech stocks is 2.02 percent. Cisco’s hike makes technology – once a dividend dead zone – the sector that pays out the single largest chunk of all S&P 500 dividends, 14.22 percent. The consumer staples sector, long valued as a relatively safe defensive area, now accounts for just a tick less, 14.21 percent.

Cisco, in its new guise, is feeling the love from analysts at Goldman Sachs and Piper Jaffray, amid a growing consensus that the networking space might not have as dismal an outlook as previously feared, and that Cisco, in particular, is poised to profit from any fresh tailwinds that begin to blow. (Goldman stuck Cisco on its “Conviction Buy List”).

Of course, that isn’t to say that Cisco wouldn’t be vulnerable if growth falls off a cliff next year. But with a solid dividend in place – in contrast to rivals like Juniper Networks (JNPR) – and that cash mountain available as security, Cisco is looking more and more like that rare creature: a safe haven stock with a hint of growth around the fringes. Not something at which to turn up your nose these days.