Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Cisco Systems, Inc. (NASDAQ:CSCO) is about to trade ex-dividend in the next two days. If you purchase the stock on or after the 2nd of July, you won't be eligible to receive this dividend, when it is paid on the 22nd of July.
Cisco Systems's next dividend payment will be US$0.36 per share, on the back of last year when the company paid a total of US$1.44 to shareholders. Based on the last year's worth of payments, Cisco Systems has a trailing yield of 3.1% on the current stock price of $46.31. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Cisco Systems has been able to grow its dividends, or if the dividend might be cut.
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 56% of its earnings to investors last year, a normal payout level for most businesses. 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.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Cisco Systems's earnings per share have been growing at 11% a year for the past five years. Cisco Systems is paying out a bit over half its earnings, which suggests the company is striking a balance between reinvesting in growth, and paying dividends. Given the quick rate of earnings per share growth and current level of payout, there may be a chance of further dividend increases in the future.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Cisco Systems has delivered an average of 22% per year annual increase in its dividend, based on the past nine years of dividend payments. It's great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
To Sum It Up
Should investors buy Cisco Systems for the upcoming dividend? We like Cisco Systems's growing earnings per share and the fact that - while its payout ratio is around average - it paid out a lower percentage of its cash flow. Cisco Systems looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
On that note, you'll want to research what risks Cisco Systems is facing. In terms of investment risks, we've identified 3 warning signs with Cisco Systems and understanding them should be part of your investment process.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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