Oracle Corporation: Consider ORCL Stock for Its Cheap Valuation and Dividend Growth


ORCL Stock is a Very Unique Income Stock 

Oracle Corporation (NYSE:ORCL) was founded in 1977 as a small database management company. Today, it is one of the largest companies that trade on the New York Stock Exchange, with a market cap greater than $200.0 billion.

Oracle serves companies from all around the world and is much more diversified compared to when it started operations. The majority of the revenue comes from its Software division. This division offers new software solutions to companies and updates previous versions of its services. The remaining revenue is from the Hardware, Cloud, and Service divisions.

With revenue from a very diversified business, Oracle’s cash flow is worth noting, and is why the dividend exists. The current yield is 1.55%, based on a trading price of $48.97. I know this yield may not interest you at first, but there is a deeper story behind the dividend.

ORCL stock enjoys hefty growth in its dividend, which is quite rare to find in the technology sector. The dividend has seen an annual increase since 2012; from this time period the dividend per share is up 216%.

This investment can be profitable without the need to trade the stock, meaning a higher return of capital over time. There is currently no reason to believe that this trend won’t continue.

Growth in the Dividend

At $0.28 of each $1.00 of earnings, the dividend payout is very conservative. Increases would be financially safe to do, with cash still available for other shareholder rewards and reinvestment back into the company.

Another reason for dividend growth is Oracle’s large cash balance of $66.0 billion as of May 2017–over 30% of its market cap. To understand how large this amount of cash is, it’s about 90% of the market cap value of Netflix, Inc. (NASDAQ:NFLX). A large cash balance such as this further supports a higher payout. (Source: “Oracle Corp., ” MarketWatch, last accessed August 23, 2017.)

With such a large cash balance there is a possibility of receiving a one-time special dividend. This would occur because the cash is not benefiting Oracle at present, and with inflation, the cash balance has less purchasing power going forward.

If a special dividend were to happen, it is difficult to predict the exact payment. For example, the total quarterly dividend in May amounted to $787.0 million for all shareholders combined.  Let’s say a round number like $20.0 billion were to be used as a special dividend; this would amount to a special dividend that is approximately 25 times the current quarterly dividend. This would amount to a one time payment of about 7.6%. This is just an example; the payment could be even more than what was mentioned. There are an endless amount of possibilities. This is why there is a lot that should be looked at rather than the 1.55% current dividend yield.

Attractive Valuation

ORCL is trading at a cheap valuation when it is compared to its competition, according to its price-to-earnings (P/E) ratio. The industry is currently trading at a P/E ratio of 41.3 times, while ORCL stock has a current ratio of 22.1 times. In other words, $22.10 would be paid to ORCL shareholders for each dollar of earnings, which is nearly double the payout of the peer group.

Investors expect the stock to trade either in line with the peer group or above. I believe investors are not diving into all aspects of the company, and therefore not making an informed decision regarding it. For example, all three margin ratios (gross, operating, and profit margins) are all greater than the industry averages.

The Bottom Line on ORCL Stock

Traditionally, dividend growth stocks are found in the consumer staples segment. These companies tend to earn a lot of cash flow regardless of the type of economy, with little change in the business model. I would put ORCL stock in the same category when it comes to tech companies.

Consider an ownership stake in ORCL stock now, as it is a great opportunity to purchase a company that is discounted compared to its peers and ignored by the markets, all while getting paid.

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