Cisco Systems, Inc. (NASDAQ:CSCO) is about to trade ex-dividend in the next 4 days. If you purchase the stock on or after the 4th of January, you won’t be eligible to receive this dividend, when it is paid on the 20th of January.
Cisco Systems’s next dividend payment will be US$0.36 per share. Last year, in total, the company distributed US$1.44 to shareholders. Last year’s total dividend payments show that Cisco Systems has a trailing yield of 3.2% on the current share price of $44.64. If you buy this business for its dividend, you should have an idea of whether Cisco Systems’s dividend is reliable and sustainable. So we need to investigate whether Cisco Systems can afford its dividend, and if the dividend could grow.
Check out our latest analysis for Cisco Systems
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Cisco Systems paid out more than half (58%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Cisco Systems generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 40% of the free cash flow it generated, which is a comfortable payout ratio.
It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it’s easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we’re encouraged by the steady growth at Cisco Systems, with earnings per share up 7.0% on average over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. Therefore it’s unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. In the past 10 years, Cisco Systems has increased its dividend at approximately 20% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
Should investors buy Cisco Systems for the upcoming dividend? While earnings per share growth has been modest, Cisco Systems’s dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. It might be worth researching if the company is reinvesting in growth projects that could grow earnings and dividends in the future, but for now we’re not all that optimistic on its dividend prospects.
Ever wonder what the future holds for Cisco Systems? See what the 23 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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