In This Article:
Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Cisco Systems, Inc. (NASDAQ:CSCO) is about to go ex-dividend in just 4 days. If you purchase the stock on or after the 4th of January, you won't be eligible to receive this dividend, when it is paid on the 20th of January.
Cisco Systems's next dividend payment will be US$0.36 per share, and in the last 12 months, the company paid a total of US$1.44 per share. Based on the last year's worth of payments, Cisco Systems has a trailing yield of 3.2% on the current stock price of $44.64. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Cisco Systems has been able to grow its dividends, or if the dividend might be cut.
Check out our latest analysis for Cisco Systems
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Cisco Systems paid out 58% of its earnings to investors last year, a normal payout level for most businesses. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. It distributed 40% of its free cash flow as dividends, a comfortable payout level for most companies.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Cisco Systems earnings per share are up 7.0% per annum over the last five years. Decent historical earnings per share growth suggests Cisco Systems has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the past 10 years, Cisco Systems has increased its dividend at approximately 20% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.