Dow Jones Industrial Average (.DJI), Cisco Systems, Inc. (CSCO): How Dividends Change the Game

The fundamentals are certainly strong enough. Cisco spends no more than 33% of its net income on dividend payments, and it spends an even smaller portion of its massive free cash flows. Sales are booming once again, driving strong GAAP and cash profits via a leaner, meaner operating model.

CSCO Free Cash Flow TTM Chart

CSCO Free Cash Flow TTM data by YCharts.

How about the core business model? There’s no doubt that data networking will remain relevant for decades to come. The PC era may be grinding to a halt, but only because of the massive growth in mobile computing. Both platforms tap into high-bandwidth uses such as high-definition video streams, and network operators constantly struggle to keep up with the rising bandwidth demand. Oh, and the “Internet of Things” revolution is just getting started. Soon enough, most data traffic will go from one machine to another without a human consumer in sight.

All told, I’d be shocked if Cisco’s hot start in dividend payments hit a brick wall anytime soon. The market is solid, Cisco’s financial health is impeccable, and there’s plenty of fiscal headroom for further dividend boosts — even if the underlying business hits a snag or two along the way.

The only real threat to Cisco Systems, Inc. (NASDAQ:CSCO)’s dividend would be if today’s smaller rivals managed to dethrone the networking king, stealing Cisco’s commanding market share. It’s a highly unlikely scenario, given Cisco’s enormous research budget, but investors must consider every possibility. Short of an outright revolution in the networking space, Cisco sure looks like a solid dividend play.

The article How Dividends Change the Game for Cisco Stock originally appeared on Fool.com and is written by Anders Bylund.

Fool contributor Anders Bylund holds no position in any company mentioned. Check out Anders’ bio and holdings or follow him on Twitter and Google+The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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