Cisco: A no-brainer buy in tech

by Paul Tracy, editor Top 10 Stocks

I am using the setback in Cisco Systems (CSCO) as an opportunity to add more shares of what I think is one of the best deals on the market.

The company's stock trades at an adjusted value ratio (operating income/cash flow from operations) of just 6.3 -- one of the lowest ratios on the market.

The company has more than $48 billion in cash on its books... totaling $9 per share, or 53% of the current share price. It returns billions to its shareholders. In the past year, it's paid $1.4 billion in dividends and added another $4.0 billion in share repurchases.

For those of you unfamiliar, Cisco specializes in networking equipment -- the tools and software that help people and computers connect with one another via the Internet.

In addition to routers and switches, the company is active in a number of other fields, including commercial network storage, video conferencing software and hardware, business telephones, and video delivery.

After comments from the company during its quarterly earnings announcement, investors panicked, dumping the shares.

Specifically, management said it was cautious about its future guidance, especially given problems in Europe. It expects to earn $0.45 per share in the coming quarter, instead of Wall Street's estimate of $0.49.

Although Cisco reported another solid quarter -- in which net income rose 20% year-over-year -- investors are panicking about the short-term outlook.

But as a long-term investor, I'm interested in one thing -- Cisco's ability to continually return money to shareholders. And on that front, it's doing an exemplary job.

Between share buybacks and its dividend, Cisco has delivered $5.4 billion to its investors in the past year. With a market cap $91 billion, that means Cisco trades with a "total yield" (which includes both buybacks and dividends) of 6%.

Meanwhile, company profits are still growing and they should for years to come. Put simply, Internet traffic is booming thanks to developing economies around the world combined with heavier Internet use in developed economies from the spread of tablets and web-enabled cell phones.

Internet traffic is growing at 50% per year, according to Morningstar. In the long-term, that's going to translate to steady demand for Cisco's networking products.

Whether the company grows a little more or a little less than Wall Street's expectations, it really doesn't change my outlook.

That's because the best way to get wealthy in the stock market is by owning companies that dominate their markets, are essential to our way of life, and that continually reward their shareholders with cash.

Cisco fits this bill perfectly. And while the stock was already cheap relative to its current and future earnings prospects, now it's a steal. I think this is a buying opportunity.

Even with its lowered forecasts the company is still wildly profitable. Cisco's cash stockpile of more than 50% of the share price also limits the downside risk tremendously (although doesn't eliminate it completely).

Meanwhile, the company continues to return much of its cash flow to investors. I think that makes adding more shares at these levels to our current position is a no-brainer.

Learn more about this financial newsletter at Paul Tracy's Top 10 Stocks.

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