Cisco Systems, Inc. (NASDAQ:CSCO) has announced that it will be increasing its dividend on the 27th of April to US$0.38. The announced payment will take the dividend yield to 2.7%, which is in line with the average for the industry.
Cisco Systems' Payment Has Solid Earnings Coverage
We aren't too impressed by dividend yields unless they can be sustained over time. Prior to this announcement, Cisco Systems' dividend was comfortably covered by both cash flow and earnings. This indicates that a lot of the earnings are being reinvested into the business, with the aim of fueling growth.
The next year is set to see EPS grow by 7.3%. If the dividend continues on this path, the payout ratio could be 53% by next year, which we think can be pretty sustainable going forward.
Cisco Systems Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The dividend has gone from US$0.24 in 2012 to the most recent annual payment of US$1.52. This implies that the company grew its distributions at a yearly rate of about 20% over that duration. So, dividends have been growing pretty quickly, and even more impressively, they haven't experienced any notable falls during this period.
Cisco Systems Could Grow Its Dividend
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Cisco Systems has seen EPS rising for the last five years, at 7.8% per annum. Shareholders are getting plenty of the earnings returned to them, which combined with strong growth makes this quite appealing.
Cisco Systems Looks Like A Great Dividend Stock
Overall, we think this could be an attractive income stock, and it is only getting better by paying a higher dividend this year. Distributions are quite easily covered by earnings, which are also being converted to cash flows. All in all, this checks a lot of the boxes we look for when choosing an income stock.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 1 warning sign for Cisco Systems that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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