Cisco Systems (NASDAQ: CSCO) issued a decent FQ2 report but guided lower for Q3, leaving the market less than inspired. However cold the guide, someone is stepping into the buy the dip, and it looks like long-term oriented value-minded income investors are the culprit. Weak results or not, the company produces solid cash flow, pays a healthy dividend, grows its distribution and is cheap to buy. Trading at 13.5X earnings, it is among the most affordable tech stocks on the market, and it pays an above-average yield. 

Cisco’s dividend is among the best in the tech universe and yields more than 3.0%, with shares near the 1-year low. The company’s earnings outlook is diminished relative to the analysts' forecasts but still ample regarding capital returns. The new guidance puts the company’s 2024 payout ratio near 44%, including the new 3% increase announced with the release. The balance sheet is also solid, presenting no red flags, with net cash and low leverage allowing. 

The cash flow also allows for substantial share repurchases. The company repurchased $1.3 billion in Q2, bringing the YTD average share count down nearly 1%. The company has $8.4 billion left under the current authorization with no expiration date, worth another 4% of the market cap, so repurchases are expected to continue in F2024 and into F2025. 

Cisco has a mixed quarter as it shifts to a subscription model

Cisco Systems had a tough quarter in FQ2, producing $12.8 billion in revenue for a decline of 5.9% from last year. The good news is that revenue beat the consensus, and the slim strength carried through to the bottom line. Segmentally, Product revenue fell 9% on a 12% decline in Networking, the core business, while Services growth offset the difference. All regions were weak, led by a 12% decline in Asia-Pacific. Within the Services segment, subscriptions are up 5%, with ARR up 6%, and the remaining performance obligation up 12%. 

Margin news is good. The company widened its gross margin in all segments on a GAAP and adjusted basis and was able to control costs. SG&A was flat, helping the company to improve its operating and income margins. The result is adjusted EPS of $0.87, down only 1% and $0.03 better than expected. 

The news that sent the market lower is the guidance. The guidance is weak for Q3 and the full year, with revenue and earnings below the consensus. However, the takeaway from the analyst chatter is that the weakness is priced into the market. Margins are good, and Q4 expects an improvement in business conditions. The twenty-four tracked by Marketbeat rate the stock a Hold and see it advancing by 17%. The post-release action includes numerous reiterated ratings, one boosted target and an initiated buy-equivalent from Wells Fargo. 

The floor is in for Cisco Systems

Institutional activity is telling. The balance of activity turned bearish in Q4 2023, aligning with the dip in share prices, and reverted to bullishness in Q1 2024. That aligns with support at a critical level and a potential for rebound that may be fulfilled later in the year. As it is, the institutions collectively own about 72% of this high-yield value play and have been building their position for years. 

The technical outlook is mixed. The stock is showing solid support near $48 and may rebound soon, but a sustained rally is unlikely until later in the year. Resistance targets near $50 and $55 will likely cap gains and keep this stock range bound until more positive news emerges. Until then, investors can count on Cisco’s dividends and repurchases to continue building value within their portfolios.