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Why Cisco Systems, Inc. (CSCO) Makes Sense for the Long-Term

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Cisco Systems, Inc. (NASDAQ:CSCO) was one of the tech darlings of the 1990’s.  The stock rose 69,230% from its public offering in February of 1990 through 12/31/1999. That equates to a 94% annual return compared to 25.6% for the NASDAQ over the same period.  Then, as though on cue, at the dawn of the 21st century, the stock stalled out, tail-spun into a rapid descent and finally, flat-lined with little hope (or expectation) of robust future earnings growth or stock price outperformance.

Cisco Systems, Inc. (NASDAQ:CSCO)

From 12/31/1999 through 12/31/ 2011 the stock generated a total return (which includes price movement and dividend income) of -61.9% or a loss of just over 7% per year.  Compare this to the return of NASDAQ for the same period–a decline of 16.9% or -1.4% per year (again including price and dividends).  When it comes to Cisco Systems, Inc. (NASDAQ:CSCO) and all fallen-angel growth stocks for that matter, investor emotions have run the gamut from love to disappointment to hate and finally, neglect.   So why buy the stock now?

The company surprised investors in May of this year when management reported better than expected fiscal year third quarter earnings.  The stock rallied dramatically on the news and is up approximately 24% year-to-date through May 31–the bulk of that return coming after the earnings report. Cisco Systems, Inc. (NASDAQ:CSCO) CEO, John Chambers, normally strikes a conservative tone.  On the May 15 earnings conference call he was surprisingly upbeat about the company’s prospects, “Cisco Systems, Inc. (NASDAQ:CSCO) is executing at a very high level in a slow, but steady economic environment…We are starting to see some good signs in the US and other parts of the world which are encouraging.”

In subsequent interviews Chambers stated that although the pace of technological change is increasing, Cisco Systems, Inc. (NASDAQ:CSCO) has historically taken advantage of change to transform the business and trounce the competition.  “Usually, when things are toughest for us is when we work harder and surprise people. That’s when they should be betting on us.” That kind of optimism bodes well for future growth.

Cisco Systems, Inc. (NASDAQ:CSCO) management and the board of directors initiated a dividend in 2011 and the quarterly dividend has gone up three-fold since then resulting in an expected yield of 2.8%. (The S&P 500 currently yields 1.3%.)  When rocket-propelled growth stocks mature, the declaration of a dividend is often perceived by investors as a declaration of surrender to future growth opportunities for the company.  But, in fact, often at this point in the company’s growth, the dividend signals what management and the board think about future earnings growth.  In other words, the dividend is frequently established as a portion of  what management and the board believe is sustainable, long-term earnings power.  John Chambers joined a dignified group of corporate managers when he said as much about a dividend increase in August of 2012:  “We wanted to send a message to shareholders.”

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