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3 Reasons Cisco Systems Stock Can Surge to $50

Bret Kenwell

Until recently, tech stocks had been on fire. Like many tech stocks, Cisco Systems (NASDAQ:CSCO) has declined in recent days. However, CSCO stock had done well previously, as it has risen 11% so far in 2018 and is up about 35% over the past 12 months.

Now that the shares are roughly 7.5% off the highs reached in May, is it time to pull the trigger and buy Cisco? For those interested in the name, here are three catalysts that can push Cisco higher.

CSCO Stock And Its Dividend Yield

Right off the bat, we have to acknowledge Cisco’s dividend. The stock has a 3.1% dividend yield, which is an attractive figure for many income investors. Even investors who aren’t solely interested in income can appreciate the quarterly payout of a stock with a 3%+ yield.

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Management increased the payout by nearly 14% in April. Shareholders have to be happy with that, despite the stock’s roughly flat performance since then. Admittedly, the company is not a dividend champion like Johnson & Johnson (NYSE:JNJ) or AT&T (NYSE:T). The latter recently reached near- must-buy levels.

However, Cisco began paying its dividend in 2011, when it paid out 6 cents per share every quarter. Management has been aggressive about raising its dividend since then, as Cisco now dishes out 33 cents per share each quarter.

Valuing CSCO Stock

On August 15th, Cisco is scheduled to report its full-year earnings results. Analysts expect it to earn $2.59 per share, representing a year-over-year increase of 8.4%. They also predict full-year revenue growth of 2.6%.

A price-earnings ratio of 16 times this year’s profit is not obscenely high, given the company’s modest growth and solid dividend. However, I think fiscal 2019 could be a real kicker for Cisco. Remember, fiscal 2019 doesn’t begin on January 1st for Cisco; its Q1 has already started.

Based on analysts’ estimates, CSCO stock trades at just over 14 times next year’s earnings. Cisco’s growth is forecast to accelerate almost 50% to 12.4% this year, much better than the 8.4% growth it delivered in 2018. Its revenue growth is expected to accelerate as well, with forecasts calling for a 3.1% increase. Are these crazy numbers like the ones we see from Advanced Micro Devices (NASDAQ:AMD) or other hot tech names? Of course not. But Cisco is growing solidly as it transitions to software and security from routers and switches, and its valuation is reasonable.

Trading CSCO Stock

chart of CSCO stock

Cisco’s dividend, growth, and valuation are all positive. So what do the charts say?

Unfortunately, the chart of CSCO stock doesn’t scream “buy.” However, it has really solid consolidation after moving significantly higher since September. Keep in mind that CSCO stock was trading for less than $30 about a year ago and has hit $45 on multiple occasions so far this year. That’s a 50% return and requires some time to digest before the next rally.

Overall, I think the sideways action is good news for CSCO stock, particularly as we go into a year in which it is expected to generate accelerating earnings and revenue growth. Also note that the stock’s long-term trend has been higher, given the rising 200-day moving average.

So where should we buy CSCO stock? I like Cisco either on a deeper pullback to its 200-day moving average or on a breakout over channel resistance. The latter move would put CSCO above all three major moving averages. Keep in mind, though, that the $45 to $46 area could act as resistance at first.

The average price target on Cisco sits right near $50, implying 16.5% upside from current levels. Also worth pointing out is that since reporting its earnings in May, CSCO has received 11 price targets of $50 or higher. So $50 is not an unrealistic target for investors who find CSCO stock attractive.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long T.

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