Cisco Systems Hikes Dividend

Recently, Cisco Systems Inc. (CSCO - Analyst Report), the leading provider of IP-based networking and other products, reported its fourth quarter results and announced its decision to raise the quarterly dividend by 6 cents to 14 cents per share. The increased dividend will be paid from fiscal year 2013.

The 75% increase in dividend is encouraging and should support share prices in the sluggish market. Given its size and scale of operations, Cisco generates steady cash flows, so investors are welcoming the returns.

During the recently concluded fourth quarter, Cisco spent $1.89 billion on share repurchases and $425 million on dividends. The cash and short-term investments balance was $48.7 billion at quarter-end, having increased $304 million during the quarter. The debt-to-capital ratio including long-term liabilities and short-term debt was just 30.7%. We remain encouraged by Cisco’s strong cash position and its ability to service its long-term debts.

We believe that continuous share buybacks and the hike in dividend will inspire investor loyalty through higher returns from the stock.

Cisco reported decent fourth quarter results, with earnings per share surpassing our expectations. The company’s revenue outlook for the first quarter is flat to down 1.8% on a sequential basis, in line with expectations. We think that Cisco is a very strong company with significant market share and customer clout that would generate solid results as the economy continues to improve. In this respect, it is encouraging to see that although Cisco is taking steps to lower its cost structure, it is not ignoring growth opportunities.

Dividend hikes are a good way of encouraging investor confidence as they return shareholder value. In Cisco’s case, we think that the increase in dividend makes the shares more attractive relative to its peers.

While competitors like Juniper Networks (JNPR - Analyst Report), Hewlett Packard Company (HPQ - Analyst Report) and F5 Networks (FFIV - Snapshot Report) are gradually picking up market share in some segments, Cisco remains by far the leader in the networking market,.

Currently, Cisco has a Zacks #2 Rank, which implies a Buy rating in the near term.