3 Reasons Cisco Systems, Inc Stock Could Rise

By Markets Fool.com

Following what can only be described as a successful fiscal 2015 Q2, and the subsequent jump in share price to a 52-week high, some investors might suggest it's a bit late to consider Cisco . At one point on Wednesday, after-hours trading pushed Cisco's stock price over 10% before "settling" around 8% higher.

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But before prospective growth and income investors kick themselves for missing the Cisco train, there are several reasons to still consider it for the long term. Sure, momentum is pushing Cisco's stock price up toward consensus analyst target price estimates of $30, but those will likely be adjusted upward after yet another strong quarter. Most importantly, Cisco's share price pop goes well beyond trading momentum, there's substance behind its stellar performance.

Lean, mean, technology machine
The numbers were bordering on gaudy: Revenue in Cisco's fiscal 2015 Q2 jumped to $11.94 billion, above analyst estimate's of $11.8 billion, and obliterating 2014's second quarter of $11.16 billion. As impressive as Cisco's top line was, more telling was its earnings-per-share improvement.

On a GAAP basis (including one-time items), Cisco improved earnings a whopping 70% year over year, from $0.27 a share to $0.46 a share. After removing one-time items, Cisco's $0.53 a share was a bottom-line improvement of nearly 13%. Great news, but what makes Cisco's per-share earnings growth more impressive was how it came about.

Generally, when a company generates nearly $800 million more revenue compared to the year-ago quarter, expenses jump accordingly. After all, it costs more to make more, right?

One of the more telling aspects of Cisco's just-completed quarter was how efficiently it grew. Despite the aforementioned jump in revenues, Cisco's total operating expenses increased a mere $184 million. Couple that with its $358 million decline in sales costs, and Cisco actually invested less this quarter than a year ago, yet generated significantly more revenue.

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The Internet of Everything
By now, most folks have heard of the Internet of Things (IoT), or as Cisco CEO John Chambers calls it, the Internet of Everything. The notion of connecting people with the world around them to form a seamless partnership between man and machines is already taking hold, and expectations are sky-high that IoT in general will become a huge industry.

Within IoT there are several niche markets, including connected cars, homes, and infrastructure to name but a few. It's in this last area of IoT that Cisco is quickly becoming a leading player. Cisco is fine letting Google use its Nest smart thermostat as a hub to dominate the smart home market, another area of IoT expected to explode. Why? Because an even faster-growing area of IoT is smart cities, and Cisco is leading the pack there.

Developing smart cities offers early entrants like Cisco almost unlimited upside. One research company suggests smart cities will become a $1.5 trillion industry over the next 10 years. So when Cisco announced yet another in a series of deals this past quarter with Santiago, Chile, to "smarten" up its infrastructure, it's worth standing up and taking notice. And Santiago follows news of similar deals with Berlin, Hamburg, and a laundry list of other cities around the globe.

Sharing the wealth
Before announcing Q2 earnings, Cisco's dividend yield of 2.8% was already near the top of its industry. Longtime competitor IBM -- now a partner in a new venture to offer customers a combined infrastructure and storage solution -- is another that pays its shareholders a sound dividend yield. Unfortunately, not all tech companies follow Cisco's and IBM's dividend-paying lead.

But Cisco certainly has no problem taking care of its shareholders. After its impressive financial performance last quarter, Cisco announced it was increasing its dividend -- again -- about 10%, and will begin paying shareholders a quarterly dividend of $0.21 a share, up from $0.19. At its current share price of $29 in early trading on Thurs, Cisco's dividend yield is nearly 3%.

In addition to putting Cisco near the top of the tech industry's growth and income list, the latest dividend hike is its fifth in the last four years, and it clearly demonstrates management's commitment to its owners. That's the kind of shareholder-first philosophy, along with its long-term growth potential, that should move Cisco up on an investor's watchlist.

The article 3 Reasons Cisco Systems, Inc Stock Could Rise originally appeared on Fool.com.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems, Google (A shares), and Google (C shares). The Motley Fool owns shares of Google (A shares), Google (C shares), and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.