Stocks with market caps exceeding $10 billion are called large-cap stocks. These stocks, which account for over 90% of the U.S. equities market, are generally better suited for conservative investors than their small- and mid-cap peers.
A market leader with a wide moat
Leo Sun (Cisco): Cisco is the world’s leading maker of networking routers and switches. Those are generally slow-growth markets, but demand has accelerated in recent quarters as enterprise campus customers upgrade their networks.
Cisco’s smaller security and applications businesses also consistently generate double-digit sales growth, and they’re still expanding through acquisitions and new services, which the company bundles with its hardware products.
That prisoner-taking strategy widens Cisco’s moat against aggressive rivals like Huawei and Arista Networks. As a result, Cisco’s software subscription revenues accounted for 65% of its top line last quarter, marking a ten percentage point increase from the prior year quarter.
Cisco’s gross margin remains well above 60%, and it generates less than 2% of its sales from China, which insulates it from tariffs and trade tensions. It expects its revenue to rise 4%-6% annually for the third quarter, and for its non-GAAP EPS to rise 15%-18%.
For the full year, Wall Street expects Cisco’s revenue and earnings to rise 5% and 18%, respectively, which is a solid growth rate for a stock that trades at 16 times forward earnings. Cisco also pays a forward dividend yield of 2.5%, and it’s been aggressively repurchasing shares ever since it repatriated most of its overseas cash last year.
I personally own shares of Cisco as a defensive stock. Investors who want to start a new position should wait for its third-quarter report on May 15 to see if it’s still firing on all cylinders.
Concerns can create opportunity
Reuben Gregg Brewer (General Mills): With a $30 billion market cap, packaged food giant General Mills is clearly big. Add in an over 100-year history, industry-leading brands, and a long track record of rewarding investors via dividends, and you start to round out the story. Now include the current yield of around 3.8%, near the high end of the company’s historical range, and General Mills starts to sound like a compelling buy.
But why is the yield so high? Two reasons. First, consumers are favoring foods perceived as healthy and fresh. That hasn’t historically been General Mills’ bailiwick. But the company is working to adjust, buying on-target brands (such as Annie’s and Blue Buffalo), selling non-core brands (Green Giant), and refreshing existing brands (Yoplait). It will take time, but General Mills has worked through transitions before over the past century.
Debt is the second issue. Buying healthy pet food maker Blue Buffalo led to a 75% increase in General Mills’ long-term debt, with some market watchers suggesting it overpaid. That said, management is aware of the problem. The dividend will remain at current levels until debt is reduced. The company can cover trailing interest expenses by a solid 4.5 times, and it paid down more than $1 billion in debt over the past year (roughly 8% of the total). At this point, even if Blue Buffalo doesn’t pan out as hoped, it looks like General Mills will manage to muddle through.
It’s more likely, however, that…
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