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With the Dow Jones Industrial Average ($DOWI) hitting new record highs as we head into the final stretch of 2023, value-minded investors might be struggling to find bargains in this red-hot market. However, there's one blue-chip stock among the Dow 30 that looks cheap at current levels, despite its mega-cap status.
To be sure, Cisco Systems (CSCO) isn't exactly the high-growth, flashy tech star it once was during the days of the dot-com boom. While artificial intelligence (AI)-linked tech stocks have taken flight in 2023, CSCO has managed an incredibly modest gain of 4.5% since the start of the year. So, if you're looking for multibagger share price returns, look elsewhere - but with CSCO priced at a discount to its sector peers, and sporting an attractive dividend yield, this tech titan could be a clutch value play for the buy-and-hold crew right now.
About Cisco Systems Stock
Cisco Systems boasts a market cap of $201.95 billion, putting the company on the more modest side of mega-cap territory. Specializing in networking, cloud, security, and Internet of Things (IoT) solutions, Cisco caters to a global clientele spanning diverse industries.
As noted, Cisco's stock hasn't quite lived up to the tech sector hype this year. The shares have lagged the performance of the broader Dow, which is up more than 12% on the year, and CSCO is down nearly 14% from its YTD peak of $58.19 in early September. For bargain-hunting investors, this pullback could present an opportunity to snag this mega-cap tech gem at a discount.
In fact, its forward price-to-earnings ratio (fwd p/e) is a steal at 12.82, roughly half of the tech sector median of 24.89. In simple terms, investors can buy into Cisco's expected earnings on the cheap, compared to the average tech stock.
Adding to the allure is Cisco's generous dividend yield of 3.12%, which surpasses both the tech sector median of 1.4% and the S&P 500 Index ($SPX) average of 1.62%. This means not only potential for capital growth but a steady income stream for shareholders.
Cisco's dividend appears rock-solid. Management has boosted the quarterly dividend for 12 consecutive years, showing a strong commitment to paying back shareholders. And with a low payout ratio of around 40%, the company can easily sustain and further boost dividend payments without jeopardizing its financial health or growth prospects.
Why Is Cisco Stock Underperforming?
Cisco Systems stock gapped sharply lower after its mid-November earnings report, dropping around 10% to mark its worst single-day decline in over a year. Cisco beat earnings and revenue expectations for the fiscal first quarter, but issued disappointing guidance for the current quarter and full year. Specifically, they forecast Q2 adjusted EPS of $0.82-0.84 on revenue of $12.6-$12.8 billion, compared to consensus estimates for EPS of $0.89 on $12.87 billion in revenue.
Plus, CSCO trimmed its full fiscal-year earnings and revenue outlook, citing “a slowdown of new product orders” as customers focused on installation and implementation “following exceptionally strong product delivery over the past three quarters.”
Despite these challenges, Cisco's management expects revenue to pick up again in the second half of the fiscal year. The company is also shifting its focus from its core business of selling network switches and routers to increasing revenue from software and services, as evidenced by its recent agreement to acquire software company Splunk, as well as high-growth areas like security, cloud networking, hybrid work solutions, 5G, and WiFi.
What Do Analysts Expect for Cisco Stock?
Wall Street analysts expect EPS at CSCO to decline slightly this fiscal year, before returning to bottom-line growth in fiscal 2025. Likewise, revenue for fiscal 2024 is expected to drop 4.25% before rebounding 3.32% in FY 2025.
The average analyst price target for CSCO is $55.53, signaling expected upside of 10.9% over the next year. Out of the 19 analysts offering their two cents, they're giving Cisco a “moderate buy” nod. Among them, 5 are waving the “strong buy” flag, 1 is in the “moderate buy” camp, 12 are on team “hold”, and 1 is throwing a “strong sell” flag. In a nutshell, analysts seem cautiously optimistic about the stock going forward.
While it may not be the hottest tech stock on Wall Street, CSCO is certainly a potential value buy at current levels. First-half challenges are seemingly priced in, and the stock offers a solid dividend yield backed by over a decade of steady growth. For investors looking to scoop up shares of a quality business at a discount price, Cisco Systems looks compelling for 2024.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
