Motley Fool: Cisco’s transition bodes well for the future

Cisco Systems (Nasdaq: CSCO) ranks as the world’s largest computer network-solutions company. Facing pressure amid softening demand for its hardware offerings, it’s adopting a more software-centric business model.

It’s investing in its transformation through internal development and a big acquisitions push. In 2016, Cisco purchased Jasper, an “Internet of Things” platform, for $1.4 billion, and it has also spent more than $4.4 billion this year acquiring companies, including AppDynamics, Viptela and MindMeld, in order to build strength in fields such as application management, artificial intelligence and software-defined wide-area networks – and to help it grow streams of recurring revenue.

Cisco’s dividend recently yielded 3.6 percent, and with the company devoting less than 55 percent of its profits to dividend payments, it has plenty of cash coming in to support its dividend and enough room on its income statement to be able to boost payouts in the future. In fact, Cisco has increased its dividend every year since it started paying dividends in 2011.

With Cisco’s price-to-earnings (P/E) ratio recently in the midteens, its valuation is far from steep. That’s due, in part, to the company’s relatively weak earnings growth in recent years. Cisco is projecting slow growth over the next few years, too. Still, its business-model transformation should position it well for the future. (The Motley Fool has recommended Cisco Systems.)

Ask the Fool

Q: Why should I stay invested in stocks if they will all go down with the market whenever it crashes? – M.B., Baton Rouge, Louisiana

A: You’re right to expect a big market drop (or “correction”) one day, as those happen every few years, on average. You needn’t exit stocks, though, unless you will need that money within the next five or 10 years. Successful investors know the value of individual stocks as well as the overall market will fluctuate over time, sometimes sharply. If you buy into healthy stocks at undervalued prices, eventually they should approach or exceed their intrinsic value. But that can take time, requiring patience.

Sell any stocks in which you have little faith, but think twice about exiting in anticipation of a drop, as no one knows what the market will do in the short term. You don’t want to be sitting on the sidelines for months or years, missing out on gains.

Q: Is now a good time to start contributing to a 401(k) account? – T.S., Las Cruces, New Mexico

A: It’s almost always a good time. When it comes to retirement, most of us should be regularly saving and investing, with little regard for the state of the economy. Sock away at least enough to grab all available matching funds from your employer. Consider saving and investing aggressively, too – as much as 10 percent or even 20 percent or more of each paycheck – in order to have a sufficient war chest for a long retirement or perhaps in order to be able to retire early. Retirement can last a long time: If you retire at 65 and live to 95, that’s a 30-year retirement.

My dumbest investment

I sold Apple years ago because it didn’t have a high enough dividend. If I hadn’t, I would have half a million dollars just from Apple. Damn. – L.M., online

The Fool responds: Ouch. You’re right to respect the power of dividends and to seek stocks with significant payouts. Researchers Eugene Fama and Kenneth French, studying data from 1927 to 2014, found that dividend payers outperformed nonpayers, averaging 10.4 percent annual growth versus 8.5 percent. Still, many strong and rapidly growing stocks without dividends can serve you well, too, as they can make up for the lack of a dividend with stellar stock-price appreciation.

Apple has indeed been a phenomenal performer in recent years, increasing in value about tenfold over the past decade. It offered a modest dividend in the 1980s and 1990s, but began paying a serious one in 2012. You may not be impressed with its payout today, which recently yielded 1.5 percent, but it has been increased by 66 percent since 2012, most recently by 10.5 percent.

When evaluating dividend payers, it’s smart to look not only at the yield, but also at how fast the dividend has been growing and how much of earnings are going toward it. Apple has been spending only about 30 percent of earnings on dividends, leaving a lot of room for growth. Don’t dismiss growing dividends – especially when the stock is growing rapidly, too.