Should You Buy Open Text Corp. for High Dividend Growth?
This first appeared as 1 of 3 top US dividend ideas for September 2017 in the Seeking Alpha Marketplace service DGI Across North America.
Open Text Corp. (TSX:OTEX)(NASDAQ:OTEX) is a mid-cap technology company, which has been growing by acquisitions in the expanding industry of enterprise information management. It is a global leader that offers software applications and cloud services in managing data.
The stock has dipped about 15% on the Toronto Stock Exchange since April. This is partially because of a stronger Canadian dollar against the USD, as the company reports in USD. So, interested Canadian investors should take advantage of a stronger loonie and pick up some shares for technology exposure.
For U.S. or Canadian investors, the stock offers above-average growth (and dividend growth) at a low multiple. At ~US$32.30, it trades at a multiple of roughly 15 and a forward multiple of roughly 13, which is attractive for the analyst consensus’s estimated 3-5 year earnings per share growth rate of 19.7% for the company.
Some reasons the stock trades at a cheap multiple are that it has an S&P credit rating of BB+ (which is two notches below the investment-grade rating of BBB-) and it grows partly by acquisitions, which have a potential of not working out as planned.
That said, the company has consistently executed well over a long time. And at the current valuation, it could very well return ~20% in the next 12-18% months.
Notably, U.S. investors will have a 15% non-resident withholding tax on the dividend unless they hold the shares in a retirement account. But the dividend is only worth a small part of the anticipated return because the stock only yields ~1.6%.
Open Text has delivered double-digit dividend growth in the last few years. And it’s capable of continuing to increase its dividend at 10-15% for the next few years.
Finviz shows an analyst consensus target price of US$40 on the stock, which represents nearly 24% upside potential.
The meaningful dip from the recent high brings Open Text to an attractive valuation for purchase. If management integrates new acquisitions well and executes on the double-digit growth expectations, the shares could appreciate 20% in the next 12-18 months.
Open Text is also a dividend growth star in the making. It has increased its dividend per share for four consecutive years, and its three-year dividend growth rate is 15.5% (based on its U.S. dollar-denominated dividend, which is an eligible dividend for Canadian investors).
Disclosure: At the time of writing, I’m long OTEX.
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This entry was posted in Dividend Ideas, Dividend Investing, Growth Investing, Investing on October 1, 2017 by Passive Income Earner.