Oracle Corporation's ORCL strategy of rewarding shareholders at the expense of investing in growth may not serve it well in the long run, according to Nomura Instinet. 

The Analyst

Analyst Christopher Eberle downgraded Oracle by two notches from Buy to Reduce and lowered the price target from $53 to $42.

The Thesis

Historically, Oracle's buyback programs since 2012 have had a high correlation with its stock performance, Eberle said in a Sunday note. The $75 billion in cumulative buybacks since 2012 have boosted earnings per share growth even as the company's operating income declined over the same period, he said. 

The capital return program is using up the company's FCF, depriving it of investment dollars into R&A and driving leverage to record highs, the analyst said. 

Oracle is unlikely to keep up the current pace of buybacks, which are running $10 billion per quarter, Eberle said. 

The analyst said even a reversion back to the historical average buyback of $3 billion per quarter over the coming years will be inadequate to meet consensus estimates.

Nomura expects buybacks to increase Oracle's debt to the point of exceeding the company's cash balance for the first time since 2007-2008. That said, the firm expects the net debt/EBITDA can likely be sustained at its 1 times forecast.

" ... We expect ORCL's incremental cost of capital to increase due to the higher rate environment as well as [a] potentially lower credit rating." 

The Price Action

Oracle shares were trading up slightly to $52.82 at the time of publication Monday.

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