When the world seems crazy, when planning for the future looks harder than ever, and when the stock market is prone to violent crashes and extreme climbs, what is an investor to do?
Panic, of course!
Seriously, here’s what I usually do when everything appears to be falling apart around us: I focus on high-quality, fairly valued companies with pristine balance sheets, loads of cash, little debt and proven business models.
Companies such as Cisco Systems (CSCO).
As if the above “Financial Sonar” from Jefferson Research isn’t reassuring enough, check out the following financial graphics from Simply Safe Dividends:
And there’s more: Cisco has $27 billion in cash vs. $16 billion in debt.
Morningstar.com
With a balance sheet like that, no wonder Standard & Poor’s gives Cisco a sky-high AA- credit rating.
Sure, I could have made a more exciting selection for our Income Builder Portfolio than an “old-tech” network-equipment maker … but I decided that “solid” and “boring” sounds pretty good these days.
So today (Tuesday, March 31), I will execute a purchase order on Daily Trade Alert’s behalf for about $1,000 worth of Cisco stock.
This will be the IBP’s second buy of CSCO in less than 4 months; I wrote about it at length both before our Dec. 10 transaction (HERE) and after it (HERE).
In addition, my DTA colleague Dave Van Knapp offered a thorough analysis of the company in November (HERE).
What’s New With CSCO?
There have been some notable developments since the articles Dave and I wrote about Cisco last fall.
Back then, analysts who followed CSCO were concerned mostly about the lingering effects of Donald Trump’s trade war with China, as the company does a lot of business in that part of the world.
Given what we all are battling today, that problem seems almost quaint — a footnote that’s barely worth mentioning.
The coronavirus COVID-19 is just about all anybody is talking about — and for good reason, with infections and deaths mounting as it sweeps across the United States, Europe and elsewhere.
Companies big and small are getting devastated by the pandemic. Commerce has come to a screeching halt in America and many parts of the world, and this past week’s uptick couldn’t prevent the stock market from entering bear territory.
Morningstar.com
There have been industries that have benefited, however.
For example, with the pandemic forcing most major corporations to conduct business virtually, Zoom Video Communications (ZM) has thrived.
Cisco long has been the dominant name in switches, routers and other networking infrastructure, but it has been working feverishly in recent years to become more of a software and services operation. One of its acquisitions was Webex — a software for hosting virtual meetings that is battling Zoom for market share.
Here’s what Cisco CEO Chuck Robbins told CNBC on March 17:
I have to say the volumes are unprecedented. In the last 10 or 11 days, our volume has literally doubled. Since the outbreak in China, we saw 22 times the traffic coming out of China; we’ve seen 4 to 5 times the traffic in Korea, Japan and other areas, and we were already the biggest platform globally.
Yesterday, we held 3.2 million meetings globally on Webex … and in the first 11 business days of March, we’ve had 5.5 billion meeting minutes.
So we’re just building as fast as we can, our teams are working 7 by 24. We’re trying to boost our collaboration team’s and our security team’s spirits because they’re working around the clock. Everybody’s working from home.
Even though Cisco has donated some use of its Webex software as corporations work together to get through this crisis, the company is building relationships that should help its bottom line once the pandemic ends.
Dividend Doings
Another new development since I last wrote about Cisco: Its dividend has been raised for the 9th consecutive year and has more than doubled since 2013, lifting its yield to 3.6%.
Although the increase was a modest 2.9%, chief financial officer Kelly Kramer said during the company’s Feb. 12 earnings call that it “reinforces our commitment to returning capital to our shareholders and our confidence in the strength and stability of our ongoing cash flows.”
Indeed, Cisco’s growing free cash flow easily covers its growing dividend, as the following graphic from McLean Capital Research illustrates.
Wrapping Things Up
One day the market is down 10%, the next day it is up 10%. Then it’s down 5%, then it’s up 5%. That’s not normal … but not much is these days.
I have no guarantee that Cisco will weather the pandemic better than other companies. How could I? There are far too many unknowns.
Nevertheless, one thing I do know is that Cisco is a fundamentally strong company with gobs of cash and relatively little debt on its sturdy balance sheet.
It was that before anybody ever heard of COVID-19, it will be that after the virus has run its course, and I am glad to take advantage of its beaten-down price to add to our Income Builder Portfolio position.
I will go into detail about Cisco’s valuation in our post-buy article, which is scheduled to be published Wednesday, April 1.
As always, investors should conduct significant due diligence before buying any stock.
— Mike Nadel
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