Best Ideas Newsletter and Dividend Growth Newsletter portfolio holding Cisco (CSCO) is popping nicely in after-hours trading May 18 after a solid fiscal third-quarter report that showed revenue growth of 3% on a year-over-year basis thanks to strength in Security (+17%), Collaboration (+10%) and SP Video (18%), and GAAP earnings per share of $0.46 (non-GAAP came in at $0.57, up 6% during the period). Service revenue jumped 11% in the quarter on a year-over-year basis, while deferred revenue advanced 8% in total. We’re reiterating our $37 per share fair value estimate of Cisco at this time, and we don’t expect its solid 2.6 Dividend Cushion ratio to change materially as a result of the incremental quarterly information. Shares yield ~4%.
The networking giant continues to make progress transitioning its business to more of a software and subscription focus (i.e. a tilt toward more recurring revenue), but we like shares for other reasons as well, not the least of which is the company’s fantastic free cash flow generation and enviable net cash position on the balance sheet. Cisco has hauled in $9.75 billion in cash flow from operations during the nine months ended April 30, more than $1.3 billion better than last year’s mark, even as its capital spending dropped over the same time. Traditional free cash flow is expanding nicely, and we like the company’s $63.5 billion cash and investments balance against a debt load of $28.6 billion. Very few other companies have stronger financial profiles than Cisco.
Looking ahead, Cisco guided the analyst community to flat-to-up 3% top-line growth for the fourth quarter of fiscal 2016 and non-GAAP earnings per share in the range of $0.59-$0.61, better than the consensus mark. Cisco’s business model transition, gross margin resiliency (up 60 basis points year-over-year in the quarter), fantastic free cash flow generation, fortress balance sheet, and attractive dividend yield make it a no-brainer position in the portfolios of both the Best Ideas Newsletter and Dividend Growth Newsletter, in our view. Management recently turned up the gears regarding dividend growth as well, lifting the payout 24% in February.