Cisco Subscription Software Growth, Dividends Are Bright Spots

Cisco Systems (CSCO) stock has bounced back nearly 20% since Feb. 11 and while there could be more upside in 2016, weaker spending by telecom customers could impact April-quarter results, says Pacific Crest Securities.

Cisco is scheduled to report earnings for its fiscal Q3 ended April 30 on May 16, after the close.

“We believe large-cap investors should continue to overweight CSCO, even after the stock has climbed 22% off  lows (now 19%), based on a favorable risk/reward ratio and the prospects for ‘The Rise of the Digital CEO’ theme to emerge as a new tailwind to drive share gains in the coming year,” Pac Crest analyst Brent Bracelin said in a research report.

He says Cisco is well positioned to capitalize as CEOs and corporate boards take on a bigger role in IT (information technology) decision-making.

Cisco stock is about even in 2016, but it was down 2% in early trading in the stock market today, and touched a nearly two-month low below 27. Cisco has a so-so IBD Composite Rating of 62 out of a possible 99.

The network gear maker’s growing software revenue is a bright spot, contends Bracelin.

“Cisco’s new leadership team continues to streamline operations and drive the model toward a higher mix of software subscriptions,” he wrote. “This, in turn, is slowly helping insulate profits during challenging periods, in our view.”

He expects Cisco to remain acquisitive even as shareholder returns increase. Cisco has nearly $36 billion in cash and investments on its balance sheet.

“Cisco recently raised its dividend by 24%, which currently equates to a 3.8% dividend yield,” said Bracelin in a report. “The only mega-tech companies with higher yield are telecom companies Verizon Communications (VZ) and AT&T (T). The $15 billion buyback is another avenue of shareholder return.”