A new FED has come into play to end 2023 with a major surprise for most investors out there trying to find a direction to bet on and the implications this new view has are plenty, but today, you will focus on how it affects one stock in particular. Because of where Cisco Systems (NASDAQ: CSCO) trades today, a new FED could send it to new highs very soon.
With up to six rate cuts proposed for 2024, a more accessible FED policy will begin to target specific areas of the economy, making markets shift their views more favorably for some stocks and unfavorably for others. The interest rate shift moves the yardstick against which stocks are measured, such as inflation and the ten-year government treasury yield.
Think of it: if a sector like real estate is offering a 3.6% dividend yield today, as measured by the Vanguard Real Estate ETF (NYSEARCA: VNQ), do you think investors will see it as a competitive product when the ten-year treasury bond yield sits at 3.8%? Not really, but all that could change soon if the bond yields drop along with FED rate cuts.
The money shift is here
When breaking down the same comparison logic against the yield benchmark (the ten-year), you can devise a reliable filter of which stocks will become market favorites when and if the FED pulls the lever down on interest rates; here's a good example of that dynamic.
A stock like Simon Property Group (NYSE: SPG), before its recent 37.0% rally in the past quarter, offered investors a near 7.5% dividend yield! Even back then, that rate beat the ten-year treasury yield, pushing it to its year-high rate of 5.0%. Why did the stock rally? Well, among many things, because its yield beat the benchmark!
Because the FED is about to cut rates, this benchmark could get a heck of a lot lower. Judging by how bond yields have declined recently from their 5.0% high to today's 3.8%, it could be the beginning of a new cheap money cycle.
Markets are forward-looking, meaning they are not going to sit around and wait for money to shift; they are shifting ahead into stocks that will make sense once the benchmark becomes low enough.
Considering that Cisco's price action not only makes it a cheap stock needing to catch up to the Technology Select Sector SPDR Fund (NYSEARCA: XLK), given its underperformance of 50.8% during 2023, it is also primed to become a buy target for most investors when you look at its dividend yield today.
Time is up
A 3.1% dividend yield may not make Cisco stock as attractive as Simon Property Group was back in the day with its 7.5% yield. However, remember, it's not the absolute yield but rather the yield compared to the next best thing: The ten-year treasury yields.
Sure, 3.1% is still below the ten-year's 3.8%, but remember that the ten-year is set to fall once the FED kicks off its cutting season. Even if Cisco's dividend only matches or surpasses the ten-year dividend by a small amount, it would still justify plenty of investors to come and surround it with buy orders.
You want to know who else is getting behind this coming shift? Analysts. Namely, the number-crunching analysts at Bank of America (NYSE: BAC) boosting the stock's price target to $60.0 a share but even taking the consensus price target of $58.4 a share will give the company a nice 15.5% upside from today's prices.
Even if the move takes longer than expected, you can't deny the powerful trends that can come from the company's financials alone. Namely, Cisco's ROIC (return on invested capital), which comes at an 18.0% five-year average, can be a second benchmark on which to base your analysis.
You see, the long-term ROIC rate will usually act as a magnet, which the annual stock price performance will begin to match. Which is why lower rates can be the spark to light a fire, but Cisco has prepared by building a solid chimney first.
There are two schools of strategy in this stock as a potential investment. First, you can beat inflation and potentially beat the ten-year yields with today's dividend offered, not to mention a double-digit upside.
Second, you can take the long view and sit comfortably on that average ROIC rate, which can act as a wealth multiplier given enough time for markets to do their thing and work their magic on the stock price.
