1 of the Best Canadian AI Stocks (With Dividends) to Buy Now

OpenText is an AI stock that trades at a significant discount to consensus price target estimates in June 2024.

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The artificial intelligence (AI) megatrend has taken Wall Street by storm, and for good reason. According to a Statista report, AI’s total addressable market is forecast to expand from US$136 billion in 2023 to US$826 billion in 2030, providing companies in this disruptive space with enough room to increase revenue in the upcoming decade.

While big tech giants such as Nvidia, Alphabet, Meta, and Microsoft are leading the race, there are several other players part of the AI segment that should help you deliver market-beating gains going forward. Here is one such Canadian AI stock that also pays you an attractive dividend. Let’s dive deeper.

An overview of OpenText

Valued at $10.9 billion by market cap, OpenText (TSX:OTEX) operates an enterprise-facing cloud-based software platform. It offers a suite of solutions across content, business networks, digital experience, operations management, security, and developer application programming interfaces. These solutions aim to help customers simplify their systems, connect their data, build frictionless automation, and thrive in a multi-cloud environment.

Down 43% from all-time highs, OpenText also offers shareholders a dividend yield of 3.44%. Despite the recent drawdown in share prices, OTEX stock has returned 85% to shareholders after adjusting for dividends in the past decade. Comparatively, the TSX index has returned 101% to investors since June 2014.

A strong performance in fiscal Q3 of 2024

OpenText reported revenue of US$1.45 billion in the fiscal third quarter (Q3) of 2024 (ended in March), an increase of 16% year over year, reflecting strong customer demand for information management and new AI capabilities.

During the earnings call, company chief executive officer and chief technology officer Mark J. Barrenechea stated, “OpenText sits at the center of connected ecosystems, the internet of clouds, and we play a trusted role as our customers adopt cloud, security, and AI.”

OpenText completed the divestiture of its AMC/Mainframe business and used the net proceeds to repay US$2 billion of debt. Its increased capital flexibility allowed OpenText to continue its dividend program and announce a share-buyback program worth US$250 million.

The TSX tech stock reported adjusted earnings before interest, tax, depreciation, and amortization of US$464 million, up 27% year over year.

A growing dividend

OpenText pays shareholders an annual dividend of US$1 per share. In fiscal Q3, it paid US$68.44 million in dividends and generated US$348 million in free cash flow, indicating a payout ratio of less than 20%.

A low payout ratio allows OpenText to raise dividends further and strengthen its balance sheet. In the last nine years, OpenText has raised its dividends by 10.7% annually. As its cash flow rose by 14% year over year in Q3, investors can expect a double-digit hike in dividends this year, too.

What is the target price for OTEX stock?

OpenText is forecast to grow its adjusted earnings per share from US$3.29 in fiscal 2023 to US$4.21 per share in fiscal 2024. So, priced at seven times forward earnings, OTEX stock is really cheap.

Out of the 16 analysts covering OTEX stock, 14 recommend “buy,” and two recommend “hold.” The average target price for the TSX tech stock is US$43, indicating an upside potential of over 50% from current levels.

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.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Alphabet, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

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