Apple
Apple currently trades at just 12 times earnings, which is much lower than the industry average of 17 for electronic equipment companies. It's raised its dividend every year since 2012, and spent just 24% of its free cash flow on those payments over the past 12 months. That low payout ratio indicates that it has plenty of room to raise its dividend.
Apple currently pays a forward yield of 2.1%, which might not seem impressive compared to the S&P 500's average yield of 2%. However, Apple's much lower P/E gives it more downside protection than the overall market.
Looking ahead, the greatest challenge for Apple will be to decrease its dependence on the iPhone, which generated over half its sales last quarter and is struggling to grow annually in a saturated smartphone market. Apple plans to do that by growing its services (Apple Pay, Apple Music, Apple Care, iTunes), selling more iOS devices to enterprise customers, and potentially developing new products like VR headsets, wearables, and electric cars. However, those plans won't boost its growth in the near term -- analysts still expect its revenue and earnings to respectively fall 8% and 10% this year.
Cisco
Cisco has a P/E of 15, which is lower than the industry average of 25 for networking and communication device companies. The company has hiked its dividend annually over the past five years, and spent just 38% of its free cash flow on those payments over the past 12 months. It currently pays a forward yield of 3.3%, which is nearly double the 1.7% yield of its rival Juniper Networks.
But like Apple, analysts don't expect Cisco to post much growth in the near term. Sales and earnings are expected to improve just 1% and 3% respectively this year. Demand for Cisco's routers and switches, which generated nearly half its sales last quarter, remains tepid -- router revenues fell 6% annually as switch revenues inched up 2%. To make matters worse, cloud-based networking platforms from rivals like Arista Networks are reducing demand for traditional networking equipment.
However, Cisco plans to diversify away from routers and switches with its higher-growth security, service provider video, and collaboration services. Cisco also plans to continue expanding inorganically across the Internet of Things, which it expects to link up to 50 billion devices to by 2020. Big enterprise partnerships with Apple and IBM will also widen its moat against smaller rivals with bundles of hardware and software services. These moves can help Cisco continue to grow in a cloud-first, mobile-first world.
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