Better Buy: Cisco Systems, Inc. vs. Oracle Corp.

Oracle (NYSE: ORCL) and Cisco Systems (NASDAQ: CSCO) are firmly established household names in the tech sector. Cisco's networking equipment can be found in data centers and network hubs around the world, right next to servers running Oracle's portfolio of database systems and other enterprise computing tools. The two companies often cross swords in the vibrant cloud computing market, and each cash machine is hooked up to a solid dividend policy.

Should you buy Cisco shares today, or is Oracle the better investment? Let's find out.

Oracle vs. Cisco by the numbers

Metric (TTM)	Cisco	Oracle
Revenue	$48.0 billion	$38.3 billion
EBITDA profit	$15.4 billion	$16.2 billion
GAAP net income	$9.6 billion	$9.7 billion
Free cash flow	$12.9 billion	$12.6 billion

Data source: Morningstar. TTM = trailing 12 months.

This is an evenly matched battle of true heavyweights. Oracle's software-based business model lends itself to wider profit margins, but Cisco makes up the difference in larger top-line sales of big-ticket hardware.

It's hard to go wrong here, since both Cisco and Oracle deliver massive sales and solid profits on a regular basis. If I have to pick a winner, I'd look to the balance sheets for a tiebreaker. There, Oracle sits on $70.5 billion in cash equivalents and $33.7 billion of debt papers. Cisco's $66.9 billion of cash is balanced against a larger $53.3 billion debt load. Neither company is going bankrupt anytime soon, but Oracle's $36.8 billion of net cash is still more attractive than Cisco's $13.6 billion.

Winner: Oracle, by a hair

Business prospects

In recent reports, Oracle showed muscular gains from its cloud computing operations. For fiscal year 2017, cloud sales skyrocketed 68% higher to land at $4.7 billion. The company is spending about $1 billion a year on growth opportunities in the cloud, adding more fuel to that revenue-growth fire. This is where Oracle is going now, replacing old-school software licenses with a focus on subscription fees for cloud-based services.

If Oracle wants to run the services that enterprises use in the cloud, then Cisco is providing the connections between the cloud-based components and their end users. Cisco also leans on other high-growth market trends such as the Internet of Things and data security services, creating a more diversified business model than Oracle's one-trick cloud computing pony.

There's nothing wrong with a cloud computing spotlight, but I prefer Cisco's broader approach to future growth prospects. In particular, I see Cisco as a major player in the security market for the long run, driving a richer mix of high-margin software subscriptions to complement the stable foundation of networking sales.

Winner: Cisco

A statue of Lady Justice, set against swirling clouds.

Creating shareholder value

So after two close races, this is the easy part. Cisco's shareholder-friendly policies make Oracle owners downright jealous.

You've already seen the comparable cash flows, but Oracle and Cisco aim their cash machines in two very different directions. Oracle pays out 22% of its free cash in the form of dividend checks, and the company is printing more shares than it buys back. At Cisco, the cash-based dividend payout ratio stands at 43% and this company retired a net of $3.6 billion in shares over the last four quarters.

If you wondered why Oracle's dividend yield stops at 1.6% while Cisco's has risen to 3.5%, there's your answer. One company treats dividends and buybacks like a shareholder-friendly use of incoming cash. The other prefers to spend its cash on large buyout deals.

For me, it's no contest.

Winner: Cisco wins the most important skirmish by a landslide

Final words

I'm not saying that Oracle is a terrible business or a bad investment. If you prefer an acquisition-hungry share printer with a singular focus on cloud computing, you should go for Oracle. Many successful portfolios contain both stocks. But Cisco is just better where it counts, at least in my book.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool owns shares of Oracle. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.