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After reporting an encouraging first quarter last month, Cisco Systems Inc. (CSCO - Analyst Report), the leading provider of IP-based networking and other products, has announced its decision to hike quarterly dividend by three cents to 17 cents per share. This translates into a 21% increase from the prior dividend.

The increased dividend will be paid on Apr 24, 2013 to stockholders of record as of Apr 8, 2013. Prior to this announcement, Cisco had been paying a quarterly dividend of 14 cents per share.

The strength of Cisco’s business model is reflected in the company’s strong cash generation capabilities and its commitment to return value to shareholders. Given its size and scale of operations, Cisco generates steady cash flows generating significant returns for investors.

Cisco’s strong balance sheet and cash flows provide financial flexibility in matters of incremental dividend, share repurchases and strategic acquisitions. During the last concluded quarter, Cisco spent $500 million on share repurchases and $743 million on dividends. The cash and short-term investments balance was $46.4 billion at quarter-end.

The debt to total cap ratio including long-term liabilities and short-term debt was just 22.7%. We remain encouraged by Cisco’s strong cash position and its ability to service its long-term debts.

Cisco reported decent second quarter results, with both revenues and earnings per share surpassing our expectations. The company provided a strong revenue outlook for the third quarter, which is expected to be up 4%–6% on a year-over-year basis. Cisco’s strong position in the computer networking equipment market, improving business, its huge portfolio and strategic acquisitions are all positives.

The regular dividend hikes are a good way of encouraging investor confidence as it returns shareholder value. The increase in dividend indicates that the company is heading toward strong future growth. Though the company’s margins have been suffering, areas, including cloud computing, mobile, data center, and others are witnessing strong growth, which will likely mitigate the margin slowdown going forward.

Currently, Cisco shares carry a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Hewlett Packard (HPQ - Analyst Report), Infinera (INFN - Snapshot Report) and Brocade Communications Systems (BRCD - Snapshot Report). While Hewlett Packard carries a Zacks Rank #1(Strong Buy), both Infinera and Brocade carry a Zacks Rank #2 (Buy).

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