Better Buy: Cisco Systems, Inc. vs. Oracle Corporation

Cisco (NASDAQ: CSCO) and Oracle (NYSE: ORCL) are both mature tech stocks that are usually owned for income instead of growth. I compared these two stocks last October, and concluded that Cisco's lower valuation, higher dividend, and heavier use of free cash flow on acquisitions and dividends made it a better buy than Oracle.

Since that article was published, Cisco shares have risen 11% while Oracle shares have climbed 19%. Was I wrong about Cisco being the better play, or will the stock head higher over the long term? Let's reexamine both companies' strengths and weaknesses to find out.

Image source: Getty Images.

How fast are Cisco and Oracle growing?

Cisco and Oracle are both slow-growth companies. Cisco's revenue growth (including its now-divested set-top box video unit) was flat in fiscal 2016, andanalysts anticipate a 2% decline this year. That slowdown was mainly caused by sluggish sales of routers and switches (46% of sales inthe first half of 2017) in a highly competitive and commoditized market.

To make matters worse, the growing popularity of "white box" hardware powered by open source software has cast a long shadow over the future of both core businesses. Cisco is trying to counter those threats by expanding its higher-growth security, wireless, and collaboration businesses, but the transition is a slow one. The company is widely expected to continue using its free cash flow ($12.3 billion over the past 12 months) to inorganically expand those businesses.

Image source: Getty Images.

Oracle's revenue declined 3% in fiscal 2016, and Wall Street expects just 1% growth this year. That anemic growth was caused by soft demand for its core database software and hardware businesses -- which was exacerbated by sluggish enterprise spending, a market shift toward leaner cloud-based solutions, and tough currency headwinds.

Like Cisco, Oracle has been pivoting away from its slower growth businesses toward higher-growth ones. Oracle's core strategy is to shift its customers toward cloud-based solutions, which include SaaS (software as a service), PaaS (platform as a service), and IaaS (infrastructure as a service) products. During the first nine months of fiscal 2017, Oracle's total cloud revenues rose 61% annually to$1.99 billion, but that accounted for just 8% of its top line.

Which company is more profitable?

Cisco had a non-GAAP operating margin of 31% last quarter, which represented a slight decline from 31.2% in the prior year quarter. That decline can be attributed to costs related to the set-top box divestment and integration costs for new acquisitions.

But over the long term, Cisco expects the growth of its higher margin security business to liftits operating margins. Cisco's non-GAAP earnings (excluding the aforementioned set-top box divestment) rose 8% last year, but Wall Street expects less than 1% growth this year.

Oracle's non-GAAP operating margin expanded from 42% to 43% between the third quarters of 2016 and 2017. That improvement can be partially attributed to the growth of its higher-margin cloud services. But Oracle's non-GAAP earnings still dipped 6% in 2016, and analysts also anticipate less than 1% growth this year.

Dividends, buybacks, and valuations...

Cisco's forward dividend yield of 3.4% is much higher than Oracle's 1.4% yield. Cisco's six straight years of dividend hikes are also a bit longer than Oracle's five-year streak. However, Oracle's payout ratio of 28% -- which is much lower than Cisco's ratio of 54% -- indicates that it has more room to raise its dividend.

But that probably won't happen anytime soon, since Oracle clearly favors buybacks over dividends. Over the past 12 months, it spent 29% of its free cash flow on buybacks but just 21% on dividends. Cisco spent 22% of its FCF on buybacks and 43% on dividends -- which might make it a more appealing play for income investors.

Both stocks are trading at discounts to their industries. Cisco's P/E of 18 is lower than its industry average of 31, and Oracle's P/E of 22 is lower than its industry average of 29.

So which stock is the better buy?

Both Cisco and Oracle are slow-moving companies which are trying to grow new businesses to offset slowdowns in older ones. Oracle has outperformed Cisco since last October, but we should also note that Cisco has beaten Oracle over the past 12 months and the last five years.

Past performance never guarantees future returns, but I'm sticking to my original conclusion that Cisco -- with its higher dividend and lower valuations -- remains a better long-term play than Oracle.

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Leo Sun owns shares of Cisco Systems. The Motley Fool owns shares of Oracle. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.