In their prime, both Microsoft (NASDAQ:MSFT) and Oracle (NYSE:ORCL) were regarded as Wall Street darlings. Today, however, both companies' growth has slowed to the point of being boring. But as many investors know, slow business growth doesn't always translate to poor investment prospects. On the contrary, sometimes the best investments are established market leaders with their biggest growth behind them.

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To get a glimpse into whether Microsoft or Oracle represents a good buying opportunity today, here's a head-to-head comparison of the two companies on three key aspects: growth, dividends, and valuation.

The raw numbers




5-year average annualized revenue growth



5-year average FCF per share growth



Dividend yield



Price-to-earnings ratio



Data source: Reuters.


With both Microsoft and Oracle achieving significant market share in their core business segments, growth has been harder to come by for these companies in recent years. This is particularly clear by looking at the trajectory of what is arguably the most important measure of success in a five-year period: free cash flow per share. Defined as a company's cash flow from operations minus capital expenditures on a per-share basis, this metric highlights the cold, hard excess cash management is generating from regular operations, beyond capital reinvested in the business.

However, though both companies are clearly no longer in growth-stock territory, Oracle's 6.5% annualized free cash flow growth during the last five years does notably easily outpace Microsoft's 0.4% annualized growth during this same period.

When it comes to growth, therefore, Oracle beats Microsoft.


As two established tech players, both Microsoft and Oracle are now paying solid dividends. But which dividend is better?

While it's tempting to conclude Microsoft's 2.6% dividend yield -- much higher than Oracle's 1.6% yield -- easily makes it the better dividend stock, the playing field evens out a bit when investors look at some other key divided metrics.

Oracle, for instance, has a much lower payout ratio than Microsoft. Defined as the percentage of earnings a company is paying out in dividends, Oracle's payout ratio is just 28%. Microsoft's payout ratio of 69.3% leaves much less wiggle room, suggesting dividend growth may not come as easily in the coming years for Microsoft compared to Oracle.

Speaking of dividend growth, Oracle also has Microsoft beat on dividend growth during the past five years -- probably a byproduct of its lower payout ratio during this period. During this time, Oracle's dividend has increased at an average rate of 24%. This compares to Microsoft's average increase of about 18%.

Overall, given Microsoft's meaningfully higher dividend yield and Oracle's superior dividend growth prospects, both companies' dividends are equally good.


Measured by the commonly used price-to-earnings valuation metric, Microsoft easily looks like the more expensive stock. Microsoft has a P/E ratio of about 29 and Oracle's P/E ratio is about 19.

But since Microsoft's sustainable earnings from operations have arguably been understated during this period thanks to large writedowns and restructuring charges, a better metric for comparing these two companies' valuations may be the price-to-free-cash-flow ratio. Using this metric, Microsoft stock is still pricier, though the difference between the two companies' valuations isn't as vast. Microsoft and Oracle's price-to-free-cash-flow ratios are about 18 and 14, respectively.

Still, Microsoft is clearly the more expensive stock.

A fundamental analysis of both Microsoft and Oracle's growth, dividends, and valuation suggests Oracle is the better stock. It stands apart from Microsoft on both growth and valuation -- and it ties Microsoft on the quality of its dividend.

While such an abbreviated analysis of these two stocks' value shouldn't replace a more in-depth look at each company, it's enough for me to bet Oracle is a better pick than Microsoft.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.