Why Cisco Systems Stock Climbed 12.3% in the First Half of 2018

What happened

Shares of Cisco Systems (NASDAQ: CSCO) climbed 12.3% in the first half of 2018, according to data provided by S&P Global Market Intelligence. The company posted solid stock gains across the year's first two quarters, building on the 27% valuation hike it registered in 2017.

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The networking giant saw momentum early in the year thanks to favorable implications from the new tax bill. Its stock then posted its largest movement year to date following better-than-expected second-quarter earnings on Feb. 14 that also arrived with a big new push to reward shareholders.

So what

Cisco stock brought in 2018 is still benefiting from strong quarterly earnings results the company posted in November 2017 — and a market rally that occurred thanks to bullish sentiment on tech stocks and the Tax Cuts and Jobs Act of 2017. The momentum continued into the beginning of February but was briefly reversed amid broader market sell-offs. The pullback was short-lived, though, as Cisco's stock quickly bounced back thanks to a strong earnings report and an overall rebound for stocks.

The company's second-quarter report delivered earnings per share of $0.64, topping the average analyst estimate for earnings of $0.59 per share. Sales for the period climbed 3% year over year to reach $11.89 billion, topping the average analyst revenue estimate of $11.81 billion. Cisco also announced a 14% dividend increase and a $25 billion increase to its stock-buyback authorization.

Shares then lost ground in March before rebounding in April and climbing in the lead-up to the company's third-quarter earnings release on May 16. This time, though, results failed to impress the market, and a significant valuation decline for the company followed. Even with those sell-offs, many Cisco shareholders were probably happy with the double-digit gains and dividend growth that occurred across the year's first two quarters.


Now what

Cisco has been working on transforming its business, moving away from one-time sales in favor of a model that generates more sales from recurring revenue streams. The company isn't abandoning the router and switching hardware that's been its bread and butter, but it's diversifying for a future in which cloud services are at the center of the networking industry. Acquisitions have been a big part of that pivot, with the company shelling out billions to acquire a range of companies including BroadSoft, Viptela, and AppDynamics in hopes of supplementing its cloud software ecosystem.

Following the repatriation of roughly $67 billion in offshore cash on the heels of last year's new tax law, the company looks to have more leeway to continue making purchases that compliment its cloud-services ambitions. It should also help the company fund additional rounds of substantial dividend growth. Shares trade at roughly 16.5 times this year's earnings and come with a 2.9% dividend yield at current prices.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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