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1 Overlooked Tech Giant Getting An AI Boost -- Why It's A Dividend Stock Investor Buy

Motley Fool - Fri Sep 15, 4:08AM CDT

Next-gen computing technology is all the rage right now, spurred on by generative AI services. Meanwhile, on the investing side of this equation, it's becoming increasingly clear that mega tech companies have a big advantage. Generative AI is incredibly expensive to develop, and massive amounts of data to train effective AI is hard to come by unless you're a large business.

One of the big businesses that seems to be enjoying a resurgence on this front is old networking and software giant Cisco (NASDAQ: CSCO). For years, it's mostly gone by the wayside in favor of cloud-based upstarts. But Cisco is more than holding its own right now and could be a dividend investor's dream stock.

Cisco's big AI comeback

Cisco is the big network infrastructure leader, rising to fame as it helped build the internet itself in the 1990s. It's a new era dominated by the cloud, pervasive connectivity, and AI, but Cisco is still very much relevant.

A few months ago, the company unveiled new custom chip designs aimed at AI networking, which help string together the thousands of Nvidia (NASDAQ: NVDA) GPUs used to train generative AI. Cisco hopes these semiconductors, which power some of its own networking hardware, will successfully compete against leaders like Broadcom (NASDAQ: AVGO) and Marvell Technology Group (NASDAQ: MRVL).

It's also part of the Ultimate Ethernet Consortium (UEC), which formed this summer to develop next-gen tech for ethernet connectivity as new demands get placed on data transfer infrastructure due to AI. UEC formed largely in response to Nvidia's domination of the generative AI market. Cisco is a founding member of UEC along with Broadcom, as well as with its scrappy higher-growth networking infrastructure competitor Arista Networks (NYSE: ANET).

But Cisco is more than a hardware company these days. It provides high-level detail on the following revenue categories:

  • Secure Agile Networks, the largest category that encompasses infrastructure like data center switches -- devices that move information around a data center, be it for a public cloud service or a company's own private data center. $29.1 billion in fiscal 2023 sales (the 12 months ended in July), up 22% year-over-year.
  • Internet for the Future, more networking hardware geared toward helping businesses manage the fast-and-steady rise of data traveling the web. $5.31 billion in 2023 sales, up 1%.
  • Collaboration, software (like Webex) and related offerings that help companies communicate via network and cloud connections. $4.05 billion in 2023 sales, down 9%.
  • End-to-End Security, more software aimed at network cybersecurity, a unit it's built with the help of numerous acquisitions. $3.86 billion in 2023 sales, up 4%.
  • Optimized Application Experiences, another software segment that's gotten a lot of help via acquisition, focused on services that help improve app performance and customer experience. $811 million in 2023, an 11% increase.

Cisco touts having AI stitched throughout its patchwork of hardware and services, but it thinks it can get a productivity boost from generative AI. Incremental investment is being made to streamline operations headed into fiscal 2024. After a stellar 2023 with some of the fastest growth in over a decade, Cisco is poised for a cool off in the next year with total sales expected to be up just 2% at the high end of guidance (excluding the effect of any future acquisitions). However, adjusted earnings per share (EPS) are expected to increase as much as 5%.

A top dividend stock for the long haul?

Of course, Cisco's forecasted 2024 slowdown should come as no surprise. The company is already massive, and while it has pockets of business benefiting from high-growth areas in tech, much of this empire has aged.

But with that age comes the ability to crank out ample cash by focusing on cost controls. Cisco cranked out $19 billion in free cash flow (FCF) over the last reported 12 months, an FCF profit margin of 33%. The company also has a stellar balance sheet with over $26 billion in cash and investments and just $8.4 billion in debt. That provides plenty of options to make more bolt-on acquisitions of smaller peers, plus pay shareholders dividends and repurchase stock.

Speaking of which, Cisco has a great track record boosting those dividends and buybacks to reward shareholders. Shares currently carry a 2.8% annualized dividend yield.

CSCO Dividends Paid (TTM) Chart

Data by YCharts.

For investors looking for exciting businesses in the generative AI age, Cisco isn't it. However, if dividend growth is what you're after, don't overlook this old tech giant. At just 18 times trailing 12-month earnings, or 12 times free cash flow, it could be a solid buy-and-hold income stock for the long term right now.

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Nicholas Rossolillo and his clients have positions in Arista Networks, Broadcom, Marvell Technology, and Nvidia. The Motley Fool has positions in and recommends Arista Networks, Cisco Systems, and Nvidia. The Motley Fool recommends Broadcom and Marvell Technology. The Motley Fool has a disclosure policy.

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