To answer the question in the title, not a heck of a lot. Long-term holders of Cisco (CSCO) shares have endured frustration over the past decade after enjoying gargantuan gains in the 1990’s. The stock is at the same level as it was in early 1999. Even the constantly rosy demeanor and projections of CEO John Chambers hasn’t been enough to jolt the stock out of its slumber. Is there any hope for the future for Cisco?
One thing to remember is that Cisco the company will likely be around for a long time and be a big player in the networking industry, but that doesn’t mean the stock is good to invest in. It could become a lumbering dinosaur that is influential in business, but is dead money. Gone are the days when investors bid the stock up to $80 per share, giving it a market cap of over half a trillion dollars. This doesn’t mean investors should give up hope.
Cash Hoard
Cisco is starting to become a mature company due to the law of large numbers. Once a company reaches a certain size, it becomes impossible to post meaningful growth due to fewer growth opportunities and a huge base of revenues to begin with. The cash on the balance sheet has balooned to over $35 billion due to a lack of investment opportunities that management can invest in. The company recently announced it will issue a dividend for the first time in the upcoming fiscal year.
This is a big positive for shareholders and might attract a whole new class of investors: income seekers. CEO John Chambers told analysts at the company’s annual analyst conference that the target yield will be 1-2% depending on upcoming tax law regarding dividends. Many investors have been unhappy with the cash building up on the balance sheet earning almost nothing in interest. Now the company will be following in the footsteps of Intel (INTC) and Microsoft (MSFT).
In terms of the company’s business, it still does have growth opportunities. Its core businesses are still growing at about 10% and is involved in several exciting growth industries such as virtualization. It will continue its strategy of acquiring smaller growth companies to fill in the void in its product line.
The stock has upside at only 12x next year’s estimates. Investors should forget about the days of exponential growth, but double-digit gains in share price annually over the next few years is certainly a possibility.
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