March 17, 2013 in Business

Cisco’s transformation gives investors return, hope for future

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Cisco Systems (Nasdaq: CSCO), with its market value topping $110 billion, has long been a tech giant, specializing in networking equipment. Its growth slowed in recent years, though, leaving some wondering whether it’s a good investment anymore.

The answer seems to be yes. For one thing, it now pays a dividend, recently offering a solid 2.7 percent yield. It’s also sitting on more than $45 billion in cash, making dividend increases, share buybacks and strategic acquisitions of other companies very possible. A catch, though, is that most of that money has been earned and stored abroad, and will generate a tax hit upon repatriation. Cisco and other companies are angling for a tax break or tax holiday, and if they get it, shareholders will benefit.

Better still, Cisco has been making some smart moves. Its unified computing systems, featuring servers, recently enjoyed 87 percent year-over-year growth and $500 million in quarterly revenue.

It’s taking aim at newer markets, too, via acquisitions, partnerships, and its virtual cloud-routing and WAN optimization platform.

Cisco’s stock seems attractively priced at recent levels, with its price-to-earnings (P/E) ratio about 12 – well below its five-year average of 16. With its significant upside growth potential, it deserves consideration for your portfolio. (The Motley Fool owns shares of Cisco Systems and its newsletters have recommended it.)

Ask the Fool

Q: When we buy a stock through a brokerage, does it send the company our money? – K.B., Farmington, N.M.

A: Not at all. Think of stocks as sort of like trading cards. When you buy a pack of gum that comes with a set of cards in it, the gum-and-card company gets its money. After that, the cards may be traded between many owners, going up and down in value, with the card company never getting a penny more.

When a company first issues shares of its stock, in an “initial public offering” (IPO), it collects its money for them, based on their estimated value at the time. After that, the shares are typically traded on major exchanges. The buyers and sellers exchange money, and middlemen such as brokerages take a cut, but money doesn’t flow to the company. In fact, if the company pays a dividend, it will be paying out part of its income to shareholders each year.

Companies do occasionally execute “secondary” offerings of stock, collecting money when those new shares are released into the market. But after that, the shares once again are simply traded between investors.

My dumbest investment

When reading The Motley Fool Stock Advisor newsletter, I noted that both Tom and David recommended Netflix. I had been a successful video-chain owner for more than 10 years and managed to get out of the business just before the brick-and-mortar collapse. It was against my better judgment to buy into Netflix, but I did it anyway. On July 24, I bought at $81.80. The stock immediately started to fall, and when I sold on July 31, I had lost 30 percent of my investment. – D., online

The Fool responds: At The Motley Fool, we generally aim to hang on to our stocks for years, not months or days. It’s good to know why you buy a stock in the first place, so that if it falls, you can ask yourself if it’s still promising. Netflix stock did take a big dive that week – but if you’d hung on, you’d have more than doubled your money by now. The stock has its detractors, but bulls like its membership of more than 33 million, as well as its foray into original programming with “House of Cards.”

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