Readers hoping to buy Oracle Corporation (NYSE:ORCL) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. If you purchase the stock on or after the 14th of July, you won't be eligible to receive this dividend, when it is paid on the 28th of July.
Oracle's next dividend payment will be US$0.24 per share. Last year, in total, the company distributed US$0.96 to shareholders. Looking at the last 12 months of distributions, Oracle has a trailing yield of approximately 1.7% on its current stock price of $57.53. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Oracle paid out a comfortable 30% of its profit last year. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Thankfully its dividend payments took up just 27% of the free cash flow it generated, which is a comfortable payout ratio.
It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.
Have Earnings And Dividends Been Growing?
Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Oracle earnings per share are up 6.9% per annum over the last five years. The company is retaining more than half of its earnings within the business, and it has been growing earnings at a decent rate. We think this is generally an attractive combination, as dividends can grow through a combination of earnings growth and or a higher payout ratio over time.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten years, Oracle has lifted its dividend by approximately 17% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.
To Sum It Up
Is Oracle worth buying for its dividend? Earnings per share growth has been growing somewhat, and Oracle is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. It might be nice to see earnings growing faster, but Oracle is being conservative with its dividend payouts and could still perform reasonably over the long run. Oracle looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in Oracle for the dividends alone, you should always be mindful of the risks involved. Case in point: We've spotted 1 warning sign for Oracle you should be aware of.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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