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Oracle Corp (ORCL) reports its results on Monday, March 11, for the quarter ending Feb 29. Due to its high and rising FCF margins, Oracle may announce a dividend hike. This makes ORCL stock appealing to value investors.
Last quarter Oracle's trailing 12-month (TTM) free cash flow was up 88% in the prior 6 quarters. It reached $10.1 billion on TTM revenue of $51.628 billion, or a 19.6% TTM FCF margin. That was up from $8.4 billion in TTM FCF on $46.07 billion in revenue a year earlier for an 18.2% TTM FCF margin.
In other words, the company's cloud business has been getting more profitable, producing more free cash flow. This can be seen in the table below.
Oracle's increasing FCF margins could both allow for a high dividend per share payment and also a higher stock price. This trend may be apparent when the company reports earnings on March 11.
Dividend Hike
In the last six months ending Nov. 30, the company generated $4.3 billion in free cash flow and paid out $2.790 billion in dividends and share buybacks. That represents 65% of its total free cash flow.
The dividend cost was $2.19 billion or just over half of its $4.3 billion in FCF for the six months. In other words, the company can easily afford its dividend.
Moreover, Oracle usually raises the dividend every four quarters. The company has paid out 40 cents per share over the past four quarters, up from 32 cents the prior year. This may mean that the company could hike its dividend another 8 to 10 cents, or 20% to 25%.
After all, the trailing 12-month FCF was up 20.3% from $8.385 billion to $10.1 billion last quarter. If its new TTM FCF stays flat it will actually be up 38% YoY (i.e., $10.1b/$7.3 billion from fiscal Q3 in 2023).
So, if the dividend per share rises to 48 cents the annual dividend per share (DPS) will be $1.92. That gives the ORCL investors a dividend yield of 1.72% at today's price of $111.63. If the annual DPS rises to $2.00, the yield will be 1.79%.
This makes the stock attractive to value investors. Moreover, they can also make extra income by shorting out-of-the-money (OTM) put options in nearby expiry periods.
Shorting OTM Puts for Income
For example, the March 28 expiration period, 3 weeks from now, has attractive short put plays. It shows that the $106 strike price, which is 5% below today's price of $111.63, trades for $2.52 on the bid side.
That represents an immediate yield of 2.377% (i.e., $2.52/$106.00) for the short seller of these puts. Moreover, the $105 strike price has a bid of $2.21, providing an immediate yield of 2.1%.
This means that an investor who secures $10,500 with their brokerage firm can obtain permission to short these puts. They can then enter an order to “Sell to Open” 1 put for expiration on March 28 at the $105 strike price. Once this is done, the account will immediately receive $221. That works out to 2.105% of the investment.
So, consider this. If the investor can repeat this trade every 3 weeks for the next 90 days, i.e., 4 times, they can make a total of $884. That provides an expected return (ER) of 8.82% on the $10,500 investment made each time the trade is repeated.
There is a downside risk that the stock could fall to the $105 strike price or below. That would require the investor to use the $10,500 to buy shares at $105 per share. But the investor has the comfort of knowing that the dividend yield is now around 1.83% at $1.92 DPS or 1.905% at a $2.00 DPS.
Moreover, if the company's FCF continues to rise, this could likely be a good long-term investment at this price.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
