Image Source: May Wong
Oracle issued what is likely conservative fiscal first-quarter 2019 guidance, but the company continues to generate record amounts of operating cash flow and has a solid net cash position on the books. We’re not worried about the dividend.
By Brian Nelson, CFA
Oracle’s (ORCL) Dividend Cushion ratio is 4.5 at the time of this writing, meaning that, on the basis of expectations of future free cash flows relative to expected cash dividends paid, assuming a nice 12-18% annual growth rate in dividends per share over the next 5 years (as shown in its dividend report), and factoring in its net cash position on the balance sheet, we expect Oracle to cover future expected cash dividends paid by a factor of 4.5 over the coming 5 year period. That’s pretty good.
In its fiscal fourth-quarter 2018 report, released June 20, Oracle noted that it generated $15.4 billion in operating cash flow during the fiscal year (ends May 31) compared to $14.1 billion in operating cash flow during the prior 12 months. Oracle’s capital expenditures fell to $1.7 billion in fiscal 2018 from $2 billion in fiscal 2017, resulting in ~13% free cash flow growth for the year ($13.65 billion versus $12.1 billion). It only paid $3.14 billion in cash dividends to shareholders during fiscal 2018, revealing considerable free cash flow coverage of cash dividends paid. Free cash flow as a percentage of net income is running at considerably elevated levels (130%-140% on a normalized basis), too, translating into high earnings quality.
Oracle ended fiscal 2018 with $67.3 billion in cash and marketable securities and $60.6 billion in total short and long-term debt, and we have no concerns about its financial health. Management delivered on its goals of double-digit non-GAAP earnings per share growth in fiscal 2018, and CEO Safra Catz believes a double-digit non-GAAP earnings per share pace of expansion is achievable in the coming fiscal 2019, too, though likely bolstered by buybacks. The market seems to be reading too much into Oracle’s lower-than-expected fiscal first-quarter 2019 guidance, in our view, and frankly, we think it’s too early in the fiscal year to be jumping to conclusions.
On the conference call, Oracle guided first-quarter fiscal 2019 revenue in constant currency to grow 1%-3% and non-GAAP earnings per share constant currency in the range of $0.68-$0.70 (up 11%-15%) for the quarter, both below consensus expectations. Though the company adopted the new accounting standard ASC 606 regarding revenue recognition (“and stopped providing specific revenue for cloud infrastructure and platform as a service”), our fair value estimate is cash based, and not necessarily based on estimates of accounting earnings, per se. We pay the most attention to cash trends, and they are mighty healthy at Oracle.
We think the market was spooked a bit by conservative first-quarter 2019 guidance, but we’re taking the long road with Oracle in the simulated Dividend Growth Newsletter portfolio. Our $50+ fair value estimate of Oracle stands well in excess of where shares are exchanging hands at the time of this writing. Though bumping heads with Amazon (AMZN), Microsoft (MSFT) and Alphabet’s (GOOG, GOOGL) Google in the “cloud” will be no easy task in the coming years, Oracle’s dividend looks to be on very solid ground, and it’s hard to be too upset with management’s revenue expectations to grow faster in fiscal 2019 than in fiscal 2018.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.