A Brief History of Oracle's Returns

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Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

  1. Dividends.
  2. Earnings growth.
  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Oracle (NAS: ORCL) .

Oracle shares returned 147% over the past decade. How'd they get there?

Dividends only accounted for a small portion. Without dividends, shares returned 142% over the past ten years.

Earnings growth over the period was strong. Oracle's normalized earnings per share have grown by an average of 15.2% a year since 2001. That's actually been about average for large-cap tech stocks, but it's impressive when compared with the earnings growth of the broader market average.

Yet if earnings grew so fast, why did Oracle's shares only return a modest amount? Another way to think about it is that earnings grew nearly 3.5-fold, while shares a little more than doubled.

This chart explains why that happened:

anImage

Source: S&P Capital IQ.

Oracle's valuation multiple has fallen by over 30% over the past decade. That's prevented a lot of its earnings growth from showing up in shareholder returns. The same has been true for other large-cap tech stocks like Microsoft (NAS: MSFT) and even Apple (NAS: AAPL) -- the market isn't willing to pay as much for these companies' earnings as it was in the past. Most of this is simply because shares were overvalued ten years ago. But today, Oracle looks much more reasonably -- even attractively -- valued. For the past decade, shareholders had to deal with contacting valuations multiples. Over the coming decade, stable, even expanding, multiples could allow more earnings growth to be reflected in shareholder returns.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

At the time this article was published

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