Dividend Watch: The Oracle Dividend Hike May Rise Exponentially Ahead (ORCL, MSFT, INTC, HPQ, CSCO)

Oracle Corporation (NASDAQ: ORCL) has been one impressive growth stock and it has  absorbed almost all the smaller major players which could have posed competitive threats down the road.  It has even gone into hardware now and margins are far better than what we would have ever imagined on that front.

We want to consider what Oracle’s new dividend yield of 0.7% now after a dividend hike could be in the future.  For starters, Oracle does have competition in its sector and in yield for technology stocks.  Hewlett-Packard Co. (NYSE: HPQ) pays a mere 0.8% yield but that is actually about to increase.  Microsoft Corporation (NASDAQ: MSFT) pays a whopping 2.5% yield and Intel Corporation (NASDAQ: INTC) now has a yield of 3.6%.  Cisco Systems, Inc. (NASDAQ: CSCO) is just now starting to pay a dividend, and we feel it is not paying out enough because it chooses to keep throwing money away on  share buybacks to stifle dilution from all of its stock options and acquisitions.

Oracle’s net income was $0.41 EPS but non-GAAP earnings were a better-than-expected $0.54 EPS.  When it comes to dividends, investors have to usually rely on GAAP earnings as the real dividend coverage.  It is no accident that the term “Pro Forma” shows up as a typing error.  The company raised guidance ahead and analysts are looking for $2.31 EPS for fiscal 2012.  If we interpolate the same GAAP percentages, we would get closer to $1.73 for the year.

Oracle is still going to be in internal growth mode, but the dividend hike from $0.05 to $0.06 is probably just a penance of what investors will expect down the road.  Let’s imply a mere 10% simple growth for earnings on a GAAP basis to be conservative and go out 5 years.  We could be looking then at $2.81 per share.  If the company was to adopt a 30% payout ratio as its model matures, then we would be looking at $0.84 in annualized dividend payouts.  Where Oracle’s stock will be then is anyone’s guess, but at today’s share price of $33.30 that would get closer to 2.5% rather than the mere 0.7% yields offered today after the dividend hike.  When you consider what Microsoft Corporation (NASDAQ: MSFT) offers in a 2.5% yield today, that could easily be Oracle in five years.

Is it fair to assume that Oracle will ever want to pay out 30% of its GAAP income in the form of dividends?  Maybe, maybe not.  That is what larger companies often target.  It is impossible to even know if Larry Ellison will be captain of Oracle’s ship in five years, let alone what the economy will be like.

JON C. OGG