Oracle (ORCL 0.49%) and HP (HPQ -0.11%) are both slow-growth tech stalwarts that are usually owned for stability and income. Both companies are firmly profitable, generate plenty of free cash flow, and regularly plow that cash into buybacks and dividends to reward their long-term investors.
Both companies bought back more than a third of their outstanding shares over the past five years, and their stocks are still fundamentally cheap. Oracle trades at just 18 times this year's earnings, while HP has an even lower forward price-to-earnings ratio of eight.
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They also pay decent dividends: Oracle has a forward yield of 1.8%, while HP pays out a higher forward yield of 2.9%. Oracle doesn't consistently raise its dividend every year, but HP has hiked its payout annually ever since it spun off Hewlett-Packard Enterprise in late 2015.
HP's lower valuation, higher yield, and more consistent dividend hikes might make it seem like a better investment than Oracle in this volatile market. But is it really the better tech dividend stock?
The key differences between HP and Oracle
HP and Oracle operate in completely different industries. HP is one of the world's largest producers of PCs and printers, while Oracle is the world's leading database management software company.
HP generates most of its revenue by selling notebooks, desktops, and workstations. The PC market is commoditized and cyclical, but HP has leveraged its scale and brand recognition to expand into higher-growth niche markets like premium notebooks, convertible devices, and gaming desktops.
HP's smaller printing business, however, faces more long-term headwinds from lengthy upgrade cycles, the rise of paperless offices, and competition from generic ink and toner suppliers. It's trying to counter those generic suppliers with its own subscription-based Instant Ink service, which provides an unlimited number of refills each month for a set price.
Oracle generates most of its revenue from on-premise database software, but that market is also highly commoditized. Over the past several years, Oracle tried to overcome that slowdown by expanding its on-premise software into cloud-based services, which are stickier and easier to scale.
It also acquired numerous companies to expand its ecosystem into adjacent markets like enterprise resource planning (ERP), analytics, and healthcare IT services. In addition, it expanded its own cloud infrastructure platform, OCI, to widen its moat against cloud giants like Amazon and Microsoft.
Which company is growing faster?
The pandemic generated tailwinds for both HP and Oracle. For HP, stay-at-home trends during the crisis boosted its sales of PCs for remote work and video games, as well as consumer printers for DIY projects. Those tailwinds largely offset its slower sales of commercial-facing PCs and printers.
HP's revenue dipped 4% in fiscal 2020, which ended in October of that calendar year, but increased 12% to $63.5 billion in fiscal 2021. Its adjusted earnings per share (EPS) rose 2% in fiscal 2020, then surged 66% in fiscal 2021 as it spent $6.2 billion on buybacks throughout the year.
Analysts expect HP's revenue and earnings to rise 4% and 13%, respectively, in 2022, with its rebounding sales of commercial PCs in a post-lockdown market offsetting its decelerating sales of consumer PCs. But in fiscal 2023 they expect its revenue to dip 1% -- but for buybacks to boost its EPS by 13% -- as the cyclical growth of the PC market cools off again. The ongoing chip shortages and supply chain challenges could exacerbate that slowdown.
For Oracle, the pandemic pressured more companies to accelerate their shift toward cloud-based enterprise software services. But before that happened, Oracle's revenue growth flatlined in both fiscal 2019 and 2020 (which ended in May of those calendar years) as the sluggish growth of its on-premise services offset the expansion of its cloud-based services.
But in fiscal 2021, its revenue rose 4% as the growth of its cloud-based services -- especially OCI, Fusion ERP, and NetSuite ERP -- accelerated. Its revenue grew another 5% to $42.4 billion in fiscal 2022.
Oracle's adjusted EPS increased 21% in fiscal 2021, then grew 5% in fiscal 2022 as it repurchased $16.2 billion in shares throughout the year. It plans to rein in those buybacks to about $600 million each quarter as it focuses on reducing its $15.8 billion in fresh debt from its takeover of Cerner.
Oracle expects the growth of its cloud services to accelerate organically in fiscal 2023, and analysts expect its full-year revenue and earnings (including Cerner) to increase by 18% and 63%, respectively. Its annual revenue growth will likely return to the single-digit levels after it laps that acquisition.
HP is still a more compelling buy
I believe HP and Oracle are both solid investments for this market, which favors value stocks over growth stocks. But if I had to choose one over the other, I'd still stick with HP because its business is simpler, its valuations are more compelling, and its dividend looks a lot more attractive.
