Passing On Cisco Systems Even At These Levels (NASDAQ:CSCO)

The stock market has been bearing down (no pun intended) and putting many investors in uncomfortable positions, positions many of them have never seen.

If you recall, the money printing press that never turned off during the pandemic brought loads of new investors into the stock market. We went through a period where workers elected not to return to work because they were making more money staying home.

More money and more time, people turned to investing to fill the void and start a wealth-building journey.

The fact that people were making more money while staying home should have brought some of the stimulus plans into question, but on the flip side, there were also many that truly needed the stimulus to make ends meet.

So now we are in the midst of a bear market, the first in a number of years, and we have a slew of new investors that have no experience investing through a bear market, which typically can lead to panic.

Older, more experienced investors have been here before. The saying I often reiterate on Twitter is “real wealth is made during a bear market.”

Old School Vs. New School

The dynamic we have right now is many investors that are on opposite ends of the spectrum, experienced and lacking experience, or old school vs. new school as kids say.

This is similar to some companies that are within the technology sector. Cisco Systems, Inc. (NASDAQ:CSCO) would fall into more of the “experienced” category with the company being founded back in 1984.

This legacy router company hit it big during the dot com boom, but since then they have had an issue innovating with the technology today. To be fair, the company does more than just sell routers these days, as they are involved in cybersecurity, wireless, IoT, switches, and other areas.

Back in 2000, CSCO shares reached a high point over $75 per share, but have since been unable to get anywhere close to that in the two decades to follow.

During that time in 2000, CSCO briefly claimed the top spot for most valuable company in the world with a market cap of $569 billion. Today, CSCO has a market cap of $177.5 billion, roughly a third of what it used to be.

Lack Of Growth

One of the problems with CSCO has been its inability to grow. We just went through the largest bull run on record for stocks, yet CSCO underperformed the market.

Over the past 10 years, the S&P 500 returned 178% with CSCO returning 158% over the same period. The past 10 years, might I add, was what I call the ‘Technology Decade.’ Companies in every industry were pouring in and investing in building up their technology within their businesses, yet Cisco was unable to capitalize, in my opinion.

Here is a look at revenues since 2013:

• 2013: $48.6B
• 2014: $47.1B
• 2015: $49.2B
• 2016: $49.2B
• 2017: $48.0B
• 2018: $49.3B
• 2019: $51.9B
• 2020: $49.3B
• 2021: $49.8B
• 2022: $51.2B (estimate)

Assuming the company meets analysts’ expectations, since 2013, the company will have grown their revenues by 5.3% with an average annual growth rate of 0.5%.

Some on here defend the company as “turning the corner” or becoming “more efficient.” I think one way to judge this could be by looking at EBITDA figures, which essentially adds back any “non-cash” related charges, such as Depreciation and Amortization.

Here is a look at the company’s EBITDA figures since 2013:

• 2013: $13.7B
• 2014: $11.8B
• 2015: $13.2B
• 2016: $14.8B
• 2017: $14.3B
• 2018: $14.5B
• 2019: $16.1B
• 2020: $15.4B
• 2021: $14.7B
• 2022: $16.0B (estimate)

Looking again over the entire period, if CSCO meets this 2022 expectation, EBITDA will have grown 16.7%. If you take out the estimated figure, EBITDA will have grown just 7.3% over a 9-year period.

Cash Flow More Than Supporting The Dividend

Turning to the cash flow statement, the company has maintained a very strong cash position over the years with low debt amounts. The company essentially operates at a net debt position of zero, which means the company has more excess cash on hand than debt.

Cash flows from operations have been growing at an average of 2% per year, but free cash flow has been climbing at a much faster rate.

Free cash flow was $10.6B in 2013 and $13.0B in 2021, which is a 23% increase over the period. The capital expenditure spends have really fallen off over the years, which partially explains the FCF increase, since FCF is calculated by taking cash flow from operations and subtracting out capex.

CapEx from 2013 to 2016 was over $1.1B per year but has been steadily falling every year since 2019, from $0.9B to just $0.7B in 2021.

In terms of the dividend, the company pays an annual dividend of $1.52 per share, which equates to a dividend yield of 3.5%. The payout ratio sits below 45%, indicating the dividend appears safe, which is also evident by the FCF figures we just reviewed.

Investor Takeaway

You do get a nice dividend, that appears stable, but there does not appear to be much more. The company has increased its dividend for 11 consecutive years now, but the dividend growth has averaged about 6% over the past 5 years. The past three dividend increases have been less than 3%.

In Q1, management did add $15B in planned share buybacks as a way to put their boatload of cash to work, but besides that, I do not see anything major in the pipeline that will propel CSCO higher.

If you are looking for a safe, cash-rich company, well, then Cisco is solid. I have owned CSCO in years past, but have since sold out of my position and I am not currently looking to add any CSCO shares any time soon.

The risks to the company are right in front of them with an economy that appears headed for a recession, which will impact their business directly. In addition, CSCO has been hit with supply chain issues as well, like many different businesses.

I am taking a wait-and-see approach when it comes to CSCO.