3 Reasons Oracle Is Not a Top Dividend Stock to Buy

By Markets Fool.com

A company can have a tremendous yield and a large buyback program, but if the underlying business is weak, then the investment return will be minimal. With the business solutions industry moving increasingly to the cloud, and current license revenue being an indication of future growth, Oracle may not have the long-term investment appeal you'd think. Here are three reasons why.

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The company's dividend isn't great
Oracle's large cash and marketable securities position of $51.6 billion is often celebrated, but ignored is its whopping $32.6 billion in debt. That's a $19 billion difference, which is mostly erased with the company's recently announced $13 billion buyback plan.

With an annual dividend yield of 1.14%, Oracle does not pay a great dividend either. The company spends approximately 20% of its earnings on dividends, which means Oracle could increase its payout and dividend if it chose too. Oracle has increased its quarterly dividend from $0.05 to $0.12 over the last five years, thereby suggesting higher dividends in the future. However, given the company's emphasis on buybacks, its high debt, and rather large acquisition strategy, investors shouldn't expect Oracle to pay a 2.5% annual dividend yield at any point in the near future.

Because cash is going elsewhere
If Oracle could stop acquiring,the company could use its cash position on larger buybacks and bigger dividends.Oracle is the unquestioned leader in end-to-end business solutions, selling hardware, software, and services to over 400,000 customers. However, while companies like Apple and Google grow from organic sales in hardware and software, Oracle has found such performance rather difficult. Instead, Oracle has elected to find growth through acquisitions.

Since 2012, Oracle has completed 26 acquisitions, including the likes of Responsys, Taleo, and most recently, Micros for over $5 billion. In looking back further, Oracle has acquired over 100 companies for more than $50 billion over the last decade.

The combined effect of those acquisitions is a company that created $8.6 billion in revenue during its last quarter, growing revenue by 2.6% year over year. While Oracle does not report sales by acquisitions, unless it acquires another public company, investors have to assume that a large portion of Oracle's growth comes from acquisitions given the amount of money it has spent.

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In fact, JPMorgan analyst Mark Murphy recently initiated coverage on Oracle with a sell rating, saying that "Oracle's organic, constant-currency revenue growth has fallen below 2% in four of the last five quarters, while global IT budget growth is pegged at closer to 3% and the software portion of IT budgets is growing closer to 5%." This showsdisappointing organicsales growth and lost market share in core businesses.

There's nothing wrong with growing through acquisitions, but at some point, it would be nice to see those past acquisitions carry Oracle, and produce significant year-over-year organic revenue growth.A good example can be seen in the company's guidance for its fiscal second quarter, where Oracle expects revenue growth of 0% to 4%. The addition of Micros will account for 2% of that growth. That's just not too impressive.

It's fast growing segment is underperforming
One area where Oracle has been most active with acquisitions is in the cloud. In retrospect, it makes sense: The cloud is mostly enterprise driven and is expected to grow from $72 billion in revenue this year to $191 billion in 2020 according to Forrester Research.

However, Oracle significantly lags in this arena, despite the cloud being considered the company's strongest growth segment. During Oracle's last quarter, it created $475 million in cloud services revenue. Its software-as-a-service (SaaS) and Platform-as-a-service (PaaS) revenue increased 32% year over year to $337 million. Its Infrastructure-as-a-service revenue grew 26% year over year to $138 million.

While these numbers look good, Synergy Research estimates the cloud infrastructure services industry as a whole grew 49% year over year during the third quarter. This means Oracle's cloud revenue growth underperformed the broader market, which translates to lost market share. Meanwhile, cloud services leaders and Oracle competitors Amazon.com, Microsoft, IBM, and Google all gained market share, thus suggesting Oracle is not well positioned to be a relevant name in this fast-growing and important industry.

Something to think about
Oracle doesn't have significant organic growth, it pays a lousy dividend, its cash position is much smaller than most investors realize, and its fast-growing cloud business is actually underperforming the broader industry. These are all reasons not to like Oracle as a long-term dividend investment.

However, one more alarming figure lies in the sales growth weakness in Oracle's core database licensing business. This business saw sales decline 2% to $1.37 billion in its last quarter, accounting for nearly 16% of total revenue and an indication of future recurring revenue. Deutsche Bank recently estimated that based on Oracle's fiscal second-quarter business outlook, licensing revenue could decline 3% to 4%, showing a further deceleration in the business.

As a result, there are red flags in Oracle's business at every turn, many of which go unnoticed thanks to the size of Oracle's business. However, given the problems that have been discussed, it is tough to imagine Oracle becoming a high yield investment, or having the business to back-up a high dividend long-term.

The article 3 Reasons Oracle Is Not a Top Dividend Stock to Buy originally appeared on Fool.com.

Brian Nichols owns shares of Apple and Google (C shares). The Motley Fool recommends Amazon.com, Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), Google (C shares), International Business Machines, Microsoft, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.