Cisco Systems, Inc. (CSCO): Safe, Strong Dividend Growth and a 3.7% Yield

Dividend Analysis: Cisco

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Cisco’s long-term dividend and fundamental data charts can all be seen by clicking here.

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Despite Cisco’s relatively short track record of paying a dividend (its dividend was initiated in 2011), the company scores very well for Dividend Safety with a rating of 87.

As seen below, Cisco’s favorable rating begins with its healthy payout ratios. The company’s free cash flow payout ratio was 36% last fiscal year, which is up significantly from several years ago as Cisco’s dividend growth outpaced its cash flow growth.

However, this is still a relatively low payout ratio for a stable business like Cisco and provides plenty of safety and room for further dividend growth.

A reasonable dividend payout ratio can be riskier than it appears if a company is highly cyclical. For example, a business with a 50% payout ratio that sees its earnings decline by 50% in a recession would see its payout ratio spike to 100%, potentially jeopardizing the safety of its dividend.

In Cisco’s case, the company performed well during the last recession. As seen below, Cisco’s sales fell by 9% in fiscal year 2009, and the company’s free cash flow per share dropped by 14%. IT spending does track GDP growth, but many of Cisco’s products and services are essential to keep a business running.

Going forward, we believe Cisco’s recession performance could be even better. The business is expanding its mix of recurring software and services revenue, which provides greater cash flow stability and visibility. One analyst from Oppenheimer estimates that Cisco’s recurring revenue has doubled since fiscal year 2008.

Cisco’s strong Dividend Safety Score is also backed up by the company’s outstanding free cash flow generation, which is needed to fund the dividend. Cisco has generated steady, growing free cash flow in each of its last 11 fiscal years. Few businesses have demonstrated such consistency.

Source: Simply Safe Dividends

Despite carrying the label of an “old” tech hardware company, Cisco’s operating margins have also been outstanding. The business makes a lot of money from selling its architectures and turn-key solutions. Growth in higher-margin recurring revenue will hopefully continue to support the company’s nice margins, which are indicative of an economic moat.