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

Slowing growth does not have to be a death knell for future stock price performance.  Nor does the initiation of a dividend. The market is full of many companies who have successfully made the transition from growth to value stock and have gone on to generate solid performance. International Business Machines Corp. (NYSE:IBM), like Cisco, managed the growth maturation process and also dealt with the additional burden of shifting technological trends.

After maturing from Nifty-Fifty growth stock darling to mature, old-fashioned computer company, IBM spent a decade in exile just as Cisco did.  But the company transformed its underlying business from mainframe-dependent to personal computer-driven in the early 1980’s and eventually earnings growth as well as the stock price re-accelerated.  Then PC’s took a back-seat to laptops and International Business Machines Corp. (NYSE:IBM) again made the adjustment.  By the time the iPhone and iPad challenged traditional lap-top computing, IBM had already transformed itself into a cloud-centric, services driven technology company.  Since Jan. 30, 1968 (the earliest data I could find) through May 31, 2013–including all the company’s fits and starts–International Business Machines Corp. (NYSE:IBM) has provided a total return of 3,483.08% (including reinvestment of the dividend) or 8.2% per year. Buying great companies for the long-term may not result in year-to-year outperformance but over the long-term, it frequently pays off.

Cisco is in the midst of the kind of technology-driven transformation IBM managed well over the last forty-plus years. Though still predominantly a networking equipment company, Cisco is expanding its portfolio of software and services that produce stable, recurring revenues.  Their particular emphasis for growth is focused on data centers which represented only 4% of sales last quarter but grew 77%. Juniper Networks, Inc. (NYSE:JNPR), remains an important competitor to watch.  The investment in new products, which drove up Juniper Networks, Inc. (NYSE:JNPR)‘s operating expenses over the last two years, now has the company poised to grow earnings over 20% and gain share in routers and switches and new products–presumably at Cisco’s expense.

The smaller, nimbler Juniper has outpaced Cisco in the past and undoubtedly will again, but for a core, long-term holding Cisco’s lower volatility is appealing.  With $30 billion in cash, a price/earnings ratio of 11.5 times next year’s earnings, a dividend yield double that of the S&P 500 and a management team executing extremely well in a difficult global economic environment, Cisco is the kind of long-term investment idea investors should consider as a core holding.

Nancy Tengler owns shares of International Business Machines., Coca-Cola, and Cisco Systems. The Motley Fool recommends Cisco Systems and Coca-Cola. The Motley Fool owns shares of International Business Machines. and Qualcomm. Nancy is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Why Cisco Makes Sense for the Long-Term originally appeared on Fool.com is written by Nancy Tengler.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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