[Investment Opinion] ORCL: Dividend-Growth Stocks Needed in Portfolios

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1. Company profile

2 Financial analysis
1. The potential for dividend growth is considerable, but the net debt burden should be kept on high alert

As can be seen from the significant increase in dividends and share repurchase plans in the recent fiscal year, Oracle is very shareholder-friendly, showing its confidence in free cash flow. The company is an excellent free cash flow creator (defined as net operating cash flow minus capital expenses), with annual free cash flow averaging approximately $10.1 billion from the 2020-2022 fiscal year.

However, due to merger and acquisition activities and large-scale share repurchase programs, Oracle's balance sheet has become bloated in recent fiscal years. In fiscal year 2022, the company bought back its shares for $16.2 billion and spent a cumulative total of $56.4 billion in fiscal year 2020-2022. As of the end of fiscal year 2022, Oracle had $21.9 billion in cash, cash equivalents, and current marketable investments, while short-term debt was $3.7 billion and long-term debt was $72.1 billion. Cash flow from operating activities fell about 27% from the level two years ago, while capital expenditure increased by about 188% during the same period.

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2. Revenue continues to grow despite headwinds

Oracle's earnings for the fourth quarter of fiscal year 2022 (ending May 31, 2022) exceeded the market's top and bottom line expectations. In the fourth fiscal quarter, the company's GAAP revenue increased 5% year over year and increased 10% at a fixed exchange rate. Meanwhile, at a fixed exchange rate, cloud revenue increased 22% year over year, with infrastructure, FusionERP, and NetSuiteERP growing by 39%, 23%, and 30%, respectively.

Notably, without considering foreign exchange headwinds, Oracle's sales growth performance in the above cloud sector declined slightly. Also, although analysts are supportive of Oracle's withdrawal from Russia in March 2022, this is a short-term headwind for the company.

1. Economic recession

In order to capitalize on the wave of cloud migration to grow, Oracle needs to continue to invest heavily in IT. If the economy declines in the short term, potential customer investment will decrease, and cloud computing adoption will slow down, and the current projected growth rate may decline.

2. Fierce competition

The three major cloud service providers (Amazon, Microsoft, and Alphabet) account for nearly 67% of the market share. Oracle has only 2% of the market share in the cloud business, and even the current double-digit growth is insufficient to gain significant market share. Therefore, Oracle will face risks from these giants, and it may be very difficult to become a leading provider.

3. Heavy debt burden

As mentioned earlier, as the acquisition plan progresses, the company's balance sheet is becoming more bloated. At the same time, considering the Federal Reserve's interest rate hike, analysts believe that if the company continues to expand acquisitions, higher debt will not be conducive to dividend growth.

1. Focus on cloud business and product improvement

Oracle provides cloud infrastructure for companies such as Amazon (Amazon), Alphabet (GOOGL), and Microsoft (Microsoft), and also provides its unique software in a cloud-native SaaS version, enabling it to provide comprehensive solutions for many businesses. Cloud infrastructure grew 36% in the last quarter, and the company plans to continue investing in this high growth engine.

2. Acquisition of Cerner

Cerner provides health information technology services, equipment and hardware, and its products are used in more than 27,000 plants around the world. While it may be difficult for Oracle to compete with cloud giants, the acquisition will help provide concrete comprehensive solutions for healthcare facilities.

Analysts are optimistic about the stock:

Oracle has an attractive business model that can drive continued revenue growth and bring better results to shareholders. Its cloud-oriented business shows growth potential, and analysts expect strong free cash flow generation to drive strong dividend growth in the future.

Although frequent share buybacks and mergers and acquisitions and a large net debt burden have had a negative impact on its dividend growth potential, investors don't need to worry too much about dividend safety. Over the past five years, the company has repaid $2.5 billion to $8.25 billion in debt each year, while free cash flow has continued to grow substantially. Analysts believe the company has sufficient resources to maintain dividends, pay interest, and reduce debt levels after the acquisition.

Attachment: ORCL stock price chart as of September 15, 2022