It’s certainly a buyers’ market when it comes to stocks these days. Valuations have come down with prices and dividends have grown. At a time like this, you can look around and see what stocks are for sale at depressed prices.
Open Text (TSX:OTEX)(NASDAQ:OTEX) is certainly looking much more appealing than it was in the high-flying days earlier this year. Before everything fell apart, this tech growth stock was trading at about $60 a share. Now, after the crash, the stock is looking much more reasonable at $40 a share. But is it worth it at this price?
A growth story
Open Text grew through a combination of acquisitions and organic growth. The growth-by-acquisition strategy of the business has saddled the company with a debt load that was certainly not a problem in the good times.
The company offers a large variety of services ranging from analytics to cybersecurity. The diverse nature of its business should be an advantage for the company, especially in uncertain times such as this. If one business were to receive less business, another business, such as its cloud services, should be able to pick up some of the slack.
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It has a great dividend
At 1.9%, Open Text does not have the biggest yield this world has ever seen. The benefit to its dividend is the fact that its payout appears to be quite resilient. It has also risen significantly over the past several years. Last May, the company increased its quarterly dividend by 15% over the previous year. As with many companies, it remains to be seen if it will continue to raise its dividend through the coronavirus pandemic, but there is history on its side.
The dividend is also supported by a fairly low payout ratio. The payout ratio sits at between 50% and 60% of trailing earnings — a level that is generally considered to be quite healthy. That being said, the short-term effects of the virus on the company are not yet known, and it is possible that its debt may inhibit dividend growth in the short term.
The bottom line
It is a strange feeling to look at stocks and trailing earnings reports when we are entering a time of unprecedented change and massive impacts on the global economy. We don’t know how each company will be able to provide more clarity in the upcoming months. All we can do is examine companies based on their debt levels, future business prospects, and dividend sustainability.
With the huge number of great companies trading at ever-falling stock prices, I am going to pass on Open Text at the moment. It is a fine company, to be sure, but there are other technology companies that I prefer with the entire market pulling back, many of which are not Canadian. In this country, I prefer to focus on Canadian banks, telecoms, and utilities.
I may come back to Open Text in the future, especially if it falls to very low levels. It has a dividend, which is somewhat of a rarity for a technology company. Many of its businesses, such as cybersecurity, are likely to continue to be in demand, as more work is done over the internet. It is a good, growing company. For now, though, I am looking at other areas for my technology exposure.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Kris Knutson has no position in any of the stocks mentioned.