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Stock Analyst Update

We’re Upgrading Cisco’s Moat to Wide With Improved Cloud Expectations

Cisco faces greater competition in new models of networking, but we expect it to retain its leadership.

Cisco building

We upgrade our economic moat rating for Cisco Systems (CSCO) to wide, from narrow, upon renewed confidence that the firm’s leadership and economic return profile will prove durable in an evolving networking market. We maintain our $54 fair value estimate, stable moat trend rating, medium uncertainty rating, and exemplary capital allocation rating.

We view Cisco Systems as the dominant force in enterprise networking and expect it to retain its strength in both legacy and future networks. Cisco holds leading market shares across switching, routing, and wireless access, with strong complementary positions in security and collaboration. We believe Cisco’s portfolio is appropriately positioned to benefit from trends toward hybrid work and hybrid cloud environments. It offers the most comprehensive suite of capabilities across converging networking and security markets, and we deem its intertwined products as sticky and worthy of a wide economic moat.

For years the emergence of the public cloud has been interpreted as the demise of Cisco. Nevertheless, we credit Cisco for appropriately evolving its networking products from a campus focus to include strong software and high-speed public cloud capabilities. Though Cisco faces greater competition in new models of networking, we expect it to retain its leadership as enterprises adopt hybrid and multi-cloud environments with new technologies like software-defined wide area networking, or SD-WAN. We also positively view its shift toward a greater mix of software and subscription sales, which should increase its customer switching costs.

Cisco’s shareholder return policies should be attractive to long-term investors. The firm has a resolute balance sheet and generates immense cash flow. It dedicates well over half of this cash flow to its dividend and repurchases, which we view favorably. Its dividend payout ratio above 50% and our forecast 3% forward dividend yield are impressive to us.