For many investors, software firm Oracle (ORCL ) is considered a tech-sector dinosaur. A hold over from the previously prosperous dot-com days relegated to the bargain bin of the technology world. It’s not growing as fast as new, smaller rivals nor is it yielding as much as other older tech stalwarts. With that in mind, most investors simply don’t find much to like about the company. It’s beige and caught between two worlds: growth and income. Not worthy of a portfolio position.
But those investors couldn’t be more wrong if their lives depended on it.
The truth is that Oracle has plenty of earnings growth, revenue growth AND dividend growth left in its system. ORCL stock makes for an ideal addition to income portfolios.
Plenty of Gas Left in the Tank
Larry Ellison’s baby made a name for itself as the premier enterprise and database management software (DBMS) back in the late 1990s. The Internet, intranets and computers were quickly becoming standard issue in the world’s offices. Managing all of this was key and Oracle became the go-to name.
Well, that leadership position in DBMS and enterprise software is still there. According to researcher Forrester Wave, Oracle still held the leading position in the database software space last year. However, ORCL’s future lies in the cloud.
The firm has expanded heavily into the cloud via new software-as-a-service (SaaS), infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) offerings. Enterprises continue to flock to these offerings as a way to reduce internal costs rather than hosting/running their own data warehouses. Oracle has been pretty successful in pivoting customers in its traditional on-premise server business towards these cloud-based platforms. The firm has realized solid growth in its cloud business and saw a 40% year-over-year jump during the latest reported quarter.
Aside from cannibalizing its own premise licensing businesses, Oracle estimates that it is also taking market share away from rivals like Workday (WDAY) and SAP (SAP ).
And there is certainly an onus to grow its cloud businesses and receive more revenue from the concept.
For one thing, these as-a-service-styled cloud businesses are much higher margined than traditional on-premise server businesses. Part of that comes from how they are priced. Oracle has focused on increasing usage-based SaaS/PaaS contracts as well as increasing subscription agreements for new customers. This includes more take-or-pay-styled contracts.
All in all, these efforts should help drive earnings down the road once ORCL complete its full transition to the cloud.
Driving Dividend Potential
For investors, the thrill in all of this is that ORCL could finally become a dividend machine. These sorts of cloud-based businesses and their high margins throw off a lot of cash for well-established firms. It’s why companies like ORCL and Microsoft (MSFT ) are flocking to them. Their scale offers them a huge advantage on the cash flow front.
The beauty in the case of Oracle is that it is already making a mint and handing over very little of it. Right now, ORCL is only paying out about 25% of its earning as dividends. That’s an ungodly low payout ratio for such a huge firm, which becomes even less when you consider that Oracle expects to sell and book more than $1.5 billion in SaaS/PaaS revenue this year. The much higher margined as-a-service business revenue translates into higher profits much faster. Eventually, you hit a point where you’re cash balance gets too high and you need to do something with it.
ORCL has favored buybacks in the past. But with $50 billion in cash and short-term investments already on its balance sheet, it’ll need to do something else with that money. M&A is one choice, but even then, ORCL is still producing a lot of cash. Buying chief rival Salesforce.com, inc. (CRM) still wouldn’t do the trick. And that doesn’t even consider any of the new cash flowing in.
So a dividend increase could be coming Oracle’s way in the near future.
Not a Stodgy Tech Stock
For investors, Oracle offers the best of both worlds: growth and income potential. On the one hand, it has plenty of growth thanks to its continued cloud rollout. That rollout of new products to old and new customers should help on the earnings front.
As for dividends, with such a low payout ratio, any extra boost in cloud-related profits should begin to trickle down to investors via increasing payouts. Investors could be treated to a large dividend boost by the second half of the year and beyond.
