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Cisco: Cheap Valuation, High Dividend Yield and Growth All in One

As the stock market races to new highs, finding cheap stocks with high dividend yields is getting harder by the day. But Cisco Systems (NASDAQ: CSCO) is a rare stock that still offers investors a blend of value, income and growth.

The stock has delivered a total return of 30% over the past one year, and there could be plenty of room for further gains.

Cisco beat earnings expectations last quarter. Several strategic initiatives are in place to fuel future Cisco growth.

Revenue, Earnings Beat Expectations

Cisco reported fiscal second-quarter earnings of $0.57 per share, on $11.58 billion in revenue. While revenue declined 2% from the same quarter last year, earnings and revenue both surpassed analyst expectations.

Looking ahead, Cisco notified investors that current-quarter revenue is likely to be flat, or decline as much as 2%.

However, the foreign exchange market is a big factor behind Cisco’s sagging revenue. Roughly 40% of Cisco’s total revenue comes from outside the U.S.

The strong U.S. dollar makes exports less competitive and reduces the value of revenue generated overseas. As a result, currency has dragged down Cisco’s top line over the past year.

In addition, Cisco’s legacy routing and switching businesses, which still represent its largest operational areas, are in decline. Routing and switching revenue declined 10% and 5% last quarter, respectively.

Fortunately, Cisco is aggressively investing in growth initiatives to offset weakening demand in its core business.

Cisco Growth Catalysts

Two compelling growth catalysts for Cisco going forward are security and wireless. These two segments posted 14% and 3% in revenue gains last quarter, respectively.

Another competitive advantage for Cisco is that it has a war chest of cash at its disposal. The company ended last quarter with more than $70 billion in cash and investments on the balance sheet. This cash can be used for a large share repurchase or strategic acquisition.

And, Cisco generates huge amounts of cash flow each year. In fiscal 2016, Cisco generated $12 billion of free cash flow, up 10% from the previous fiscal year.

For example, Cisco made 12 acquisitions in 2016, to advance its strategic initiatives. These acquisitions were made across new growth areas like the Internet of Things, cloud and security.

In January, the company acquired AppDynamics for $3.6 billion, its largest acquisition over the past five years.

The over-arching strategy for Cisco is to transition from hardware to software. Routing and switching, which are still Cisco’s main businesses, are low-margin and in decline. By contrast, software is a growth engine.

AppDynamics’ software is used by a variety of customers, including the financial and retail industries, to help make quick fixes across their corporate networks.

With so much cash on the balance sheet and the company’s ability to access cheap debt, investors should expect continued transformational deals from Cisco moving forward. This should help the company return to more significant growth rates in 2017 and beyond.

Unique Value & Income

Not only is there a long runway of Cisco growth up ahead, but its shares are still a bargain. The stock trades for a price-to-earnings ratio of 17, which is well below the market average. The S&P 500 Index trades for a price-to-earnings ratio of 26.

And, Cisco raised its dividend by 11% when it announced quarterly earnings. The forward annualized dividend rate of $1.16 per share provides investors with a hefty 3.5% dividend yield.

Cisco growth is clear; it is a tremendous dividend growth stock. Its dividend payout has more than tripled over the past five years.

Cisco stock is cheaper than the S&P 500, with an above-average dividend yield. The company is investing for future growth, thanks to its excellent balance sheet. As a result, the stock is an attractive pick for a mix of value, income and growth.

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