Shares of Oracle Corporation (ORCL), the dominant $160 billion tech giant that manufactures hardware and software system products, has been brushing its 52-week high recently. On the face of it - Oracle, with a P/E of 16x and price/book of 3.8x, is in line with the valuations of the general market.
A great business
Oracle is a fantastic business, no doubt about it. In 2012 alone, the company has raked in $37 billion in total revenues. This is a tremendous 42% increase from 2010. Not only that, but Oracle demonstrates extreme levels of profitability. It boasts a gross operating margin of 38% and a gross profit margin of 28%. That is pretty remarkable.
This robust level of sales, together with the extraordinary profitability rate have produced more than $13.5 billion in cash from operations, after taxes, in the past three years. Unfortunately for shareholders, they got almost nothing from it.
Shareholders take last seat
I believe that Oracle is not a shareholder-friendly company, and that is for the following two reasons:
Reason #1: Dividends
Oracle isn't a great fan of dividend payouts. In fact, in the past three years it has delivered only $129 million back to its shareholders in the form of dividends. This might seem like a lot but it is only a tiny fraction of the $24 billion in net income that the company has made in the same period. This is why Oracle's Div. yield is a paltry 0.7% compared to its major rivals - Microsoft Corporation (MSFT) and SAP (SAP), with Div. yield of 3.3% and 1%, respectively.
Reason #2: Aggressive share issuance
Oracle likes its employees and board members very much. In fact, the company is so in love with its team that it has issued over 38 million shares to them in all forms of compensation over the last three years. Under the section "Notes to Financial Statements" of the company's recent Form 10-K, you can find further details on the generosity of Oracle. In particular, stock based compensation for 2012 totaled $615 million. That is one staggering amount, especially when considering that the same item for the years 2011 and 2010 totaled $340 million and $290 million, respectively. As of May 2012, the number of outstanding options exercisable to common shares reached 422 million. The average exercise price for the shares is $22.66. That brings the total cost to $9.5 billion (!). That is one massive dilution to current shareholders.
I would rather be Oracle's employee than Oracle's shareholder on any given day. The company pays a paltry dividend and dilutes its shareholders. I recommend to sell any shares that you might have in Oracle.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.