Cisco Systems: Bad, and Good, News

Networking hardware specialist Cisco Systems (Nasdaq: CSCO) reported its third-quarter results in May, featuring revenue up by 14% year over year and earnings per share up 7%.

CEO Chuck Robbins said that in the third quarter, “we delivered record revenue and double-digit growth in both software and subscription revenue.

“As key technologies like cloud, AI (artificial intelligence) and security continue to scale,” Robbins continued, “Cisco’s long-established leadership in networking and the breadth of our portfolio position us well for the future.”

Investors didn’t rush to grab more shares after that, though – because management also reported that total product orders were down 23%.

That appears to be a precursor to sagging revenue, but there’s more to the decline.

The improving global supply chain is a factor, with many customers waiting to receive previous orders before placing new ones, and economic uncertainty has other customers putting off orders.

Those should be short-term issues.

Cisco’s order backlog is expected to be roughly double its normal size at the end of the fiscal year, so any economy-driven order declines won’t show up as revenue declines for a while.

Cisco’s cancellation rates remain below historical levels, a sign that customers aren’t pulling back all that hard just yet.

While earnings could decline if customers hit the brakes harder, Cisco’s stock certainly doesn’t look expensive.

Long-term investors able to stomach some volatility should take a closer look. (The Motley Fool owns shares of and has recommended Cisco Systems.)

Ask the Fool

Q. I’m thinking that Facebook parent company Meta Platforms, trading near $250 per share, might split its stock soon. Would that be a good time to buy? – H.M., Laramie, Wyoming

A. Not necessarily. A stock split will lower the share price, but it won’t change the value of your holding.

Let’s imagine you own 50 shares of Meta Platforms, it’s trading at $250 per share, and it executes a 10-for-1 stock split.

Before the split, your 50 shares would be worth $12,500.

After the split, you’d suddenly own 10 times as many shares – 500! But the share price would have been adjusted downward proportionately at the split, from $250 to $25.

So you’d then own 500 shares worth around $25 each, for a total value of … $12,500.

In short: Don’t wait for stock splits or get too excited by them.

Companies may execute them to make their shares more affordable and attractive to investors, but if you had $500 to invest, you could buy just one share of a $500 stock instead of 20 shares of a $25 one.

The stock price alone doesn’t reflect whether or not it’s a bargain.

Plenty of companies rarely or never split their stocks. Meta Platforms is one of those companies which, to date, never has.

Q. What’s a company’s payout ratio? – A.R., St. Augustine, Florida

A. It’s the percentage of its earnings that are paid out in dividends.

Citigroup, for example, pays out $2.04 per share annually ($0.51 per quarter), and its trailing 12 months’ worth of earnings total $7.52, per Yahoo! Finance.

Divide $2.04 by $7.52, and you’ll arrive at a payout ratio of about 0.27, showing that around 27% of Citigroup’s earnings go to its dividend.

Payout ratios near or above 100% are problematic because they’re not sustainable.

My Smartest Investment

My smartest investment was buying shares of stock in my employer via a workplace purchase plan. Doing so showed the power of dollar-cost averaging and dividend reinvestment. – D.R., online

The Fool responds: There are both pros and cons to using Employee Stock Purchase Plans (ESPPs) to build your wealth.

As you noted, by participating, part of your salary is regularly and automatically deployed to buy shares (or fractions of shares) of your employer’s stock, typically at a discount to their prevailing price.

If shares are trading around $80 each, you might pay only $72 apiece, putting you well in the black from the get-go. (That discount generally counts as taxable income, though.)

If your dividends are reinvested in additional shares, those shares will also grow for you – eventually generating dividends of their own.

An ESPP can have some unwelcome restrictions, including when you can buy or sell your shares, so be sure you understand the rules before participating.

Here’s another consideration: You’re already receiving most or all of your income from your employer.

If you park much (or all) of your investment money in its stock, then you’ve got a heck of a lot of eggs in that one basket.

You may have great faith in your employer, but even good companies can fall on hard times.

Consider making an ESPP part, but not all, of your investments.