The stock market is akin to a store.
That’s why it’s called a market.
Instead of buying food or clothes, one is buying financial products.
But the concept is similar.
However, what’s not similar is this: The stock market seems to be the only market in which people run away from deals.
People usually love deals and flock to sales, but cheaper stocks tend to encourage selling (not buying).
It’s strange and obviously counterproductive.
The good news is, there’s an investment strategy that discourages this kind of behavior.
It’s called dividend growth investing.
This is a long-term investment strategy which involves buying and holding shares in world-class businesses rewarding shareholders with steadily rising cash dividend payments.
You can find hundreds of examples of what I mean by taking a look at the Dividend Champions, Contenders, and Challengers list – a source of invaluable information on US-listed stocks that have raised dividends each year for at least the last five consecutive years.
When you’re steadily building an empire of high-quality businesses paying you ever-larger cash dividends, market volatility almost becomes background noise.
Moreover, bargains in the stock market are looked at as buying opportunities for long-term dividend growth investors, as it’s more equity and dividend income for the same fixed cost outlay.
All else equal, lower stock prices result in higher yields, so sales are seen as something to run to.
This flip in psychology has been one of the many benefits for me over the years as I’ve followed the dividend growth investing strategy.
That’s my real-money portfolio which generates enough five-figure passive dividend income for me to comfortably live off of.
This allowed me to retire in my early 30s.
As I’ve been hinting at here, dividend growth investing almost builds in a mindful approach to a critical aspect of long-term investing: valuation.
See, price only represents what you pay, but value represents what you get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
Having a built-in preference for undervalued high-quality dividend growth stocks means one naturally runs toward the stock market sales, setting them up for immense success, wealth, and passive income over the long run.
But having a preference and actually knowing how to execute are not the same.
This is why Lesson 11: Valuation is such a worthwhile read.
Written by fellow contributor Dave Van Knapp, it explains exactly what valuation is and how to quickly spot undervalued opportunities that can be taken advantage of.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Oracle Corp. (ORCL) is an American multinational technology company.
Founded in 1977, Oracle is now a $404 billion (by market cap) tech behemoth employing around 140,000 people.
Oracle is one of the world’s largest providers of enterprise software and cloud services.
Oracle started out as a database company, pioneering the first commercial SQL-based relational database management system.
Oracle Database is now the world’s most widely used database management system.
Although it’s not the cheapest, its size, scope, reliability and performance often make it worth the premium.
But Oracle is much more than this.
The company has since built out a portfolio of applications and infrastructure technologies for all kinds of enterprise IT needs.
A large component of that portfolio is Oracle’s cloud capacity.
The company’s cloud computing service ranks as one of the largest in the world, giving Oracle a huge leg up in a world in which compute and capacity have become vital for workloads.
Parlaying database leadership into cloud scale makes Oracle one of the few companies in the world that can offer integrated capabilities across data, infrastructure, and software – perfectly positioning the company for next-generation, AI-focused workloads.
Oracle’s scaled positioning is impressive, as is its consistent ability to pivot and execute in a space that is constantly changing and evolving.
Another impressive aspect is the growth present across revenue, profit, and the dividend.
Dividend Growth, Growth Rate, Payout Ratio and Yield
To date, Oracle has increased its dividend for 17 consecutive years.
The 10-year dividend growth rate of 12.8% is quite solid, but this has actually shown an acceleration almost straight through the decade.
The most recent dividend raise came in at an astounding 25%.
Put simply, Oracle has been a dividend growth machine.
A lowish yield of 1.4% on the stock is the trade-off one makes for the massive growth, but it is 20 basis points higher than its own five-year average.
And it also beats what the broader market offers.
With the payout ratio sitting at just 34.3%, Oracle has plenty of headroom for more large dividend raises.
As long as there’s not an immediate need for income, Oracle’s dividend growth execution is very appealing and may be just getting started.
Revenue and Earnings Growth
As appealing as this may be, though, it’s largely founded on prior activity.
However, investors must always be anticipating future activity, as the capital of today gets risked for the rewards of tomorrow.
That’s why I’ll now build out a forward-looking growth trajectory for the business, which will be highly useful when later estimating intrinsic value.
I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Blending the proven past with a future forecast in this way should put us in a position to confidently surmise where the business could be going from here.
Oracle moved its revenue from $37.8 billion in FY 2017 to $67.4 billion in FY 2026.
That’s a compound annual growth rate of 6.6%.
Good, albeit not amazing, top-line growth.
It should also be noted that Oracle acquired electronic health records leader Cerner for roughly $28 billion in 2022, which moved the revenue needle.
Meanwhile, earnings per share rose from $2.24 to $5.83 over this period, which is a CAGR of 11.2%.
That’s a bit more like it, and I’d point out that the last five years have been particularly strong for Oracle’s bottom line.
Huge buybacks supercharged bottom-line growth, with Oracle reducing its outstanding share count by a staggering 31% over the last decade.
Looking forward, CFRA is projecting a 20% CAGR for Oracle’s EPS over the next three years.
This would represent a sizable jump over what transpired above, although the last five years have had growth closer to this 20% mark (explaining the acceleration in dividend growth).
CFRA cites a few key reasons to be enthusiastic: Oracle’s combination of deep relationships with the largest enterprise customers, entrenched foundational database software, earned trust for mission-critical enterprise applications, and scaled cloud capacity.
That last point is a tricky one, because CFRA also notes there’s a possibility of excess compute capacity (stemming from unprecedented AI infrastructure spending).
That spending is partly coming from Oracle itself, which is weighing on both compute capacity and Oracle’s own balance sheet (which I’ll touch on soon).
For example, OpenAI has a $300 billion AI infrastructure pact with Oracle, whereby the former will buy $300 billion in computing power over five years to train and run its models.
This pact requires Oracle to build the infrastructure necessary (such as sprawling data centers) upfront in order to provide this computing power – even as there are questions surrounding OpenAI’s ability to fund its end of the bargain.
Regarding the AI infrastructure buildout, I like the fact that Larry Ellison, who founded Oracle and still owns roughly 40% of it, is actively involved with the company through his Chairman position as Oracle actively leans into a new era.
If we zoom in on recent numbers out of Oracle, a 20% forecast is rooted in reality.
For instance, FY 2026 revealed a 34.3% YOY jump in EPS.
I always like to err on the side of caution and introduce a margin of safety, so modeling in a go-forward 20% growth rate off of a proven base of ~11% is a tough ask.
However, I really don’t think Oracle needs to post 20% growth in order to be a compelling investment here.
If the business can continue to put up even just low-teens bottom-line growth, that positions the dividend for a similar track.
Putting that on top of the starting yield gets one to a mid-teens type of annualized total return, which would obviously be highly satisfactory.
Financial Position
Moving over to the balance sheet, Oracle has a challenged financial position.
Its long-term debt/equity ratio is 2.8, while the interest coverage ratio is 5.
The former number is skewed negatively by low common equity (itself a function of the huge buybacks), so I think it’s better than it looks, but that latter number is real and modestly concerning.
Oracle’s long-term debt load has exploded higher in recent years, ending last year at over $120 billion – nearly three times higher than it was a decade ago (back when Oracle was sitting on net cash).
The company’s spending on AI infrastructure is becoming a weight.
Now, $120 billion isn’t overly concerning for a company of Oracle’s size and might.
And Oracle’s credit ratings are in investment-grade territory (albeit at the low end): Baa2, Moody’s; BBB, S&P.
But the balance sheet is easily the weakest part of the business, and it stands in stark contrast to where a lot of other tech giants are sitting at in terms of financial strength.
Profitability, on the other hand, is quite good.
While ROE is N/A because of the balance sheet structure (shareholders’ equity is sometimes a negative number), net margin has averaged 19.9% over the last five years.
Also, ROIC is typically in a mid-teens area.
Not the best profitability I’ve seen, but Oracle is clearly generating fat margins and fairly high returns on capital.
Overall, although I’d like to see a better balance sheet, this is a great business with leading positions across lucrative tech verticals.
And with economies of scale, garnered trust, established enterprise relationships, physical infrastructure, IP, R&D, and switching costs, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Competition, regulation, and litigation are omnipresent risks in every industry.
Although competition has historically been a somewhat limited issue, as each major American tech company has kind of competed in its own silo, competition is starting to become an issue for Oracle as major players converge around AI and compute (which also happens to require huge spending).
The spending spree occurring in the AI infrastructure buildout is both increasing competition for Oracle and reducing its balance sheet strength.
Speaking of balance sheet strength, the company’s financial position is starting to look strained.
Although an obvious leader in database, Oracle lacks leadership in cloud computing and is not yet an established leader in AI.
Oracle’s enormous OpenAI deal gives Oracle outsized exposure to one AI firm and ties a large portion of Oracle’s AI fortunes to OpenAI’s finances and execution.
AI infrastructure is requiring a very large spending outlay upfront with no guarantee of ROI on the other side.
Oracle has been a major repurchaser of its own shares, providing a tailwind to per-share earnings growth, but the current CapEx cycle is likely to severely curtail buybacks.
Being a global company, Oracle is exposed to geopolitics and exchange rates.
While Oracle has long struck me as a fairly low-risk business with clear leadership, I see new risks mounting.
However, with the stock down 60% from its late 2025 peak, the market has responded harshly and created what might be a pretty attractive entry point now…
Valuation
The P/E ratio has compressed to 22.9.
For a company expected to grow at 20%/year, that’s not high and puts the PEG ratio at nearly 1.
This is also well below the stock’s own five-year average P/E ratio of 31.9.
The P/CF ratio of 14.8 is also way below its own five-year average of 19.2.
And the yield, as noted earlier, is higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a two-stage dividend discount model analysis.
I factored in a 10% discount rate, a 10-year dividend growth rate of 15%, and a long-term dividend growth rate of 8%.
This near-term dividend growth rate looks like easy lifting for a company that recently increased its dividend by 25% and is staring down the possibility of 20% EPS growth.
It could prove to be overly conservative, especially if all of this spending ends up being more than justified by new AI-linked revenue, but Oracle’s debt load could weigh on the firm’s ability to be generous.
After another fruitful decade, I’d thereafter assume a high-single-digit growth rate suitable for a large, mature technology company.
The DDM analysis gives me a fair value of $194.20.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
From my vantage point, this stock has been overly punished.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates ORCL as a 4-star stock, with a fair value estimate of $207.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates ORCL as a 3-star “HOLD”, with a 12-month target price of $194.00.
We have a tight spread this time around. Averaging the three numbers out gives us a final valuation of $198.40, which would indicate the stock is possibly 29% undervalued.
-Jason Fieber
Note from D&I: How safe is ORCL‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 50. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, ORCL’s dividend appears Borderline Safe with a moderate risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I have no position in ORCL.