3 Good Reasons to Buy Cisco Stock Today
Nov 12th 2013 2:16PM
Updated Nov 12th 2013 2:18PM
Cisco Systems is gearing up for a hotly anticipated first-quarter report after Wednesday's closing bell. Cisco is the strongest performer on the Dow Jones Industrial Average today. The company hasn't unveiled any market-moving news today, so you can chalk this jump up to investors getting excited ahead of the report.
No company is perfect, and Cisco certainly has its flaws. That being said, here are three big reasons why you might want to get in on the Cisco action right now.
The Unified Computing experiment is finally paying dividends
Cisco made a huge bet on expanding its core business in 2010. No longer content to dominate the data networking sector, Cisco announced a line of server-class computing systems, designed to work in tandem with Cisco's networking gear.
The effort, known as Unified Computing, cost Cisco dearly at first. Longtime partners IBM and Hewlett-Packard immediately started distancing themselves from their long-standing Cisco partnerships. HP bought a networking company of its own, and IBM selected a different networking resales partner. Cisco sacrificed a ton of cooperative selling assistance for this server play.
Three years later, the server division is starting to pull its own weight. Cisco's Unified Computing Systems are now sold in package deals with high-end Nexus routers, and that combination is delivering a $5.5 billion annual revenue run rate nowadays. That's 11% of Cisco's total revenue stream, and sales are growing 35% annually -- way ahead of the company's overall 6% growth rate.
You could argue that Cisco is becoming the new end-to-end IT hardware provider in the IBM mold, even as IBM itself is moving on to a new software-centered strategy. And you can (finally) thank the UCS project for the good news.
The actual dividends sure help, too
Cisco paid its first dividend in 2011, just before starting that crazy/awesome UCS strategy. Since then, Cisco's board has nearly tripled the annual payout per share and boosted Cisco's yield from 1.3% to 2.9%.
That's an exceptionally shareholder-friendly dividend policy -- and one you should expect to continue for a long time. Cisco has plenty of headroom for future dividend growth, even if its fundamental business stalls out for a while, as only 28% of Cisco's current free cash flow goes toward dividend checks.
The surging UCS effort looks set to drive Cisco's results to respectable gains this quarter, but analysts haven't jumped onto that bandwagon. Average earnings estimates have actually crawled lower over the last three months. Wall Street likes to base estimates on management guidance, but Cisco CEO John Chambers is notoriously careful about setting the bar low.
If Cisco beats its own guidance again, analysts will be left flat-footed. Some may point to the next guidance aiming low -- in fact, you should expect this -- but that's just the way Chambers plays the guidance game.
This last point is more of a short-term gamble than a serious investing thesis. Truly Foolish investors are always advised to take the long view, where the UCS adoption and strong dividend trends play a much larger role.
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The article 3 Good Reasons to Buy Cisco Stock Today originally appeared on Fool.com.Fool contributor Anders Bylund has no position in any stocks mentioned. Check out Anders' bio and holdings or follow him on Twitter, LinkedIn, and Google+. The Motley Fool recommends Cisco Systems. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.