Cisco Systems (NASDAQ: CSCO) has declared the first ever dividend for company shareholders. The move to pay a dividend is seen as an attempt to prop up Cisco's declining share price and a way to use some of the corporation's significant cash hoard. The initial dividend from Cisco will be 6 cents per share paid to shareholders of record on March 31. Payment date is April 20.
Cisco is the world's largest provider of networking and switching equipment. This equipment makes up the backbone of the Internet and other networks connecting computers. Cisco's customers are the enterprise level companies which build these networks. Major competitors to Cisco include Juniper Networks (JNPR) and Hewlett Packard (HPQ).
Shares of CSCO have been on a downward path for the last 10 months. Each earnings report has resulted in a 10 to 20 percent drop in the share price. Cisco was at $27 in May 2010 and now trades around $17. The total decline has been 37 percent of the share value. Actual earnings per share has been right on the money in relation to the estimates put out by Cisco management and the Wall Street analysts. It seems the market is expecting more and is punishing the stock when the forecast earnings are met and Cisco is not showing strong growth above expectations.
At the end of the company's 2011 second quarter on January 31, the Cisco balance sheet listed over $40 billion in cash and investments. This number was $1.2 billion higher than the previous quarter. It is obvious Cisco is generating plenty of cash. The 6 cent per share dividend will cost $335 million each quarter. Net income has averaged 41 cents per share over the most recently reported four quarters providing in the neighborhood of six times dividend coverage.
The declaration of a dividend which equates to a 1.4 percent yield does not seem to be enough to significantly help the Cisco share price. Earnings and revenues for the next couple of quarters are forecast to show little growth over 2010 results. It appears the next two or more quarters are more likely to be hard on the share price, reflecting the reactions to earnings reports in August and November of 2010 and February of 2011. The price chart tells the tale for how the market reacted to those earnings releases.
Cisco management seems to want to return the company to a path of 15 to 17 percent annual growth and the dividend is a token measure to help support the stock price. Another option would be to boost the dividend quickly in the future and attract the types of investors who look for a growing stream of income from their stock investments.