Cisco (CSCO) announced quarterly earnings results after the market closed on Wednesday, May 17, causing its stock price to drop by approximately 8% in after-hours trading.
If Cisco’s current stock price holds, shares will have a dividend yield near 3.7% when the market opens. That’s much higher than the broader market’s dividend yield, which sits near 2%.
Cisco’s dividend yield looks even more appealing for income investors after considering the company’s impressive three-year annual dividend growth rate of 15%, which includes the double-digit dividend raise management announced earlier this year.
However, many large technology companies face serious challenges that could erode their businesses over time. One example is International Business Machines (IBM), a company Warren Buffett poured more than $10 billion into only to begin selling the stock from his dividend portfolio earlier this year after acknowledging the challenging future IBM faces.
Let’s take a closer look at why the market was so disappointed with Cisco’s latest earnings report and evaluate if the stock’s dip could be a buying opportunity for investors seeking the best high dividend stocks or signs of a value trap.
How does Cisco make money?
Cisco has been in business for more than 30 years and is one of the most important technology companies in the world. The company’s products (74% of sales) and services (26%) are sold to businesses of all sizes, and most of its offerings connect computing devices to networks or computer networks with each other.
Switches and routers are the company’s largest product categories and are primarily used to connect devices on computer networks and move data across the internet. However, Cisco has increasingly invested into faster-growing areas such as security, wireless, and other types of recurring software and services revenue.
Cisco’s business is also very global with around 40% of its total revenue coming from outside of the Americas region.
Source: Cisco Annual Report
Cisco maintains dominant market share positions in many of its core offerings, driven by the company’s scale and ability to to provide customers with an entire suite of solutions with its network equipment and services.
The company has evolved over the years from selling basic networking hardware to providing higher-value packages of complete architectures and solutions that improve customers’ businesses.