A ~7% Drop? This Is Another Opportunity to Buy This Tech Stock

Why has Open Text Corp. (TSX:OTEX)(NASDAQ:OTEX) stock declined despite a 15% dividend increase?

Kay Ng

Kay began investing in dividend stocks around 2008 via the concept of value investing. Since then, she has expanded into growth investing, including in small caps. Her passion for investing has only grown over the years! After graduating from UBC with a BSc in Computer Science, she took university courses in financial markets, finance, and financial accounting. She has contributed her works to Motley Fool, Sure Dividend, and Seeking Alpha.

Published May 10, 2018 2:00 pm EDT

Here Open Text Corp. (TSX: OTEX)(NASDAQ: OTEX) goes again. It’s not uncommon for its stock to make a big move after a earnings report.

Despite that the company experienced double-digit growth, the market punished the stock by pushing it down by ~7%. Seriously, the market is so hard to please.

OpenText’s Q3 results

Here are some key metrics compared to the same period in 2017:

	Q3 fiscal 2017	Q3 fiscal 2018	Change
Total revenues	US$593.1 million	US$685.9 million	15.6%
Annual recurring revenues	US$440.5 million	US$521.4 million	18.3%
Diluted earnings per share	US$0.45	US$0.54	20%
Adjusted EBITDA	US$189.1 million	US$227.2 million	20.2%
Operating cash flows	US$156.3 million	US$270.7 million	73.2%

Notably, some of the growth was helped by favourable currency exchange. On a constant-currency basis, OpenText experienced total revenue growth of 10.8%, annual recurring revenue growth of 13.9%, and diluted earnings-per-share growth of 13.3%.

Perhaps OpenText’s double-digit growth for the quarter was eclipsed by its higher growth experienced in Q2 (compared to the same period in the previous year). At the time, the tech company released its Q2 results, the stock popped as much as 15%. However, the stock couldn’t maintain its altitude.

Now is the time to pick up some OpenText

In the linked article, I’d said, “Since the stock has just run-up, it is unlikely to move much higher in the near term. That said, the dividend-growth company is reasonably valued today. Interested investors can begin scaling in to the stock. Cautious investors should buy on any weakness — perhaps a dip to the low $40s.”

Now that the stock is trading in the low $40s, it’s time to consider picking up some shares. At ~$43.90 per share, OpenText trades at a forward price-to-earnings multiple of ~13, which is very reasonable for its growth rate, which is expected to be north of 10%.

OpenText offers a growing dividend

After the dip and the fact that OpenText just hiked its dividend by 15%, the stock now offers a yield of almost 1.8%, which is at the high end of its historical range. OpenText has increased its dividend for five consecutive years.

The company’s three-year dividend-growth rate is 15.3%. OpenText’s payout ratio is estimated to be ~23% this year. So, it’s still reinvesting a large portion of its earnings back into the business.

How much upside does OpenText have?

The analysts are positive on OpenText on a collective basis. The Bank of Nova Scotia analyst has a 12-month target of US$45 per share on the stock, which represents ~32% near-term upside potential.

Investor takeaway

OpenText is a reasonably priced tech stock for double-digit growth and a growing dividend, as long as you pick it up at a reasonable price. Right now, in the low $40s, the stock is trading at a reasonable valuation.