Why Cisco Topped the Dow's Record Quarter
The Dow Jones industrial average posted its best quarter since the financial crisis, up 11% to 25,928.68. The top-performing of the 30 Dow components was tech company Cisco Systems Inc. (NASDAQ: CSCO), and it topped it in spectacular fashion, rising 24.6% to $53.99.
Cisco’s performance was doubly impressive because of its outperformance of other Dow tech stocks. Apple Inc. (NASDAQ: AAPL) shares rose 20.42% to $189.95. Chip company Intel Corp. (NASDAQ: INTC) was up 14.43% to $53.70. Microsoft Corp. (NASDAQ: MSFT) shares increased by 16.12% to $117.94.
What caused Cisco’s shares to surge? Two obvious answers are what Cisco has done directly for investors, beyond the company’s financial performance. Cisco announced it would buy back as much as $15 billion in shares. For a public corporation with a market value of $250 billion, this is a significant benefit. Share buybacks often lift earnings per share because fewer shares are in circulation. Another reason is the healthy dividend. Cisco’s yield is 2.42%, high for a major tech company. By contrast, Apple’s is 1.55%.
But the major reason Cisco has done well is its role in what likely will be the largest revolution in consumer wireless broadband in a decade. Cisco makes cloud and router products for 5G networks, which will be rolled out across the world in the next several years. 5G is the wireless system that will replace the 4G systems used in most developed and developing countries. Its speed is as much as 20 times faster than its 4G predecessor. 5G should be available to 3 billion people within three to four years. But network providers will have to invest. As an example of the market’s size, AT&T Inc. (NYSE: T) posted capital expenditures of $21 billion last year, much of it to build out its early 5G networks.
Finally, Cisco’s earnings have been impressive. In the most recently reported quarter, which ended January 29, its bottom line substantially improved. Revenue rose 5% to $12.4 billion. Earnings rose from a loss of $1.78 per share a year ago to a profit of $0.63. The company said that in the current quarter, growth would be even more impressive. Revenue is expected to grow as much as 6% compared to the same quarter of last year. A per-share earnings outlook of $0.76 to $0.78 handily topped Wall Street expectations.
If stock prices are based on corporate performance and earnings forecasts for the next one to three years, which they are for many analysts, the sea change in wireless technology represented by 5G and Cisco’s role in it has driven its shares up at a pace that made it the top Dow stock of the first quarter. Its performance in the future likely will continue to impress.