Is OpenText Stock a Buy for Its 3.6% Dividend Yield?

OpenText stock has dropped 20% in the last year, yet now the company looks incredibly valuable, especially with a 3.6% yield!

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published November 25, 2024 8:15 pm EST

OpenText (TSX:OTEX) has taken bold steps to reassure and reward its investors, recently increasing its dividend and authorizing a significant share buyback program. These moves, combined with strategic business developments, have brought the stock into focus for potential buyers. But is OpenText stock a buy? Let’s dive into the details.

The letters AI glowing on a circuit board processor. — Source: Getty Images

Cash to investors

First, let’s start with the dividend. OpenText stock has increased its dividend by 5%, bringing the annualized payout to $0.26 per share quarterly. This move reflects confidence in its cash flow and the company’s commitment to rewarding long-term investors. With a forward dividend yield of approximately 3.6%, OpenText stock is offering a solid income stream, especially for investors who value consistent payouts.

Beyond the dividend, the company launched a $300 million share buyback program. This initiative aims to reduce the number of outstanding shares, effectively increasing earnings per share and potentially boosting the stock value. Share buybacks are often a sign of management’s belief in the company’s undervalued status, signalling confidence in future performance. Combined with the dividend hike, these actions paint a picture of a company focused on shareholder returns.

Strength in numbers

Financially, OpenText stock’s recent earnings were a mixed bag. The company reported annual revenues of $5.8 billion for fiscal 2024, up 29% year-over-year, showcasing robust growth fuelled by its acquisition of Micro Focus. Recurring revenue made up $4.5 billion of this total, or 79%, underscoring a stable and predictable income model. However, the quarterly revenue growth year-over-year dipped by 11%, reflecting some short-term pressures, likely tied to market conditions and transitional challenges post-acquisition.

The Micro Focus acquisition has been a transformative but complex process for OpenText. While the deal significantly expanded the company’s portfolio and market reach, it also brought integration challenges. Over the past year, OpenText stock has executed a rigorous optimization strategy, cutting $500 million in costs and reducing its workforce. These efforts aim to restore pre-acquisition efficiency levels and improve adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) margins, which are a critical focus for investors.

On the growth front, OpenText stock is doubling down on cloud computing and artificial-intelligence (AI)-driven solutions. The company has set a target of 2–5% cloud revenue growth for the current fiscal year, with aspirations of reaching 7–9% growth in the coming years. A key part of this strategy is its Aviator platform, which leverages AI to enhance information management solutions. While Aviator is still in its early stages, it’s already seeing adoption among enterprise clients, further strengthening OpenText’s position in the market.

Yet the stock is down

Despite these promising initiatives, OpenText stock’s performance has been somewhat lacklustre. Over the past year, the share price has dropped by approximately 20%, trailing many of its peers in the tech sector. Analysts have noted this decline, citing market skepticism around the Micro Focus integration and the broader tech industry’s recent volatility. However, OpenText’s valuation metrics suggest the stock might be undervalued. The company currently trades at a forward price/earnings (P/E) of 8, a compelling figure compared to industry averages.

What’s more, OpenText stock’s strong focus on operational efficiency and shareholder value makes it a standout in the tech sector. The company’s ability to generate significant free cash flow, combined with a disciplined approach to capital allocation, bodes well for its long-term outlook. Its 3.6% dividend yield, backed by a consistent payout history, adds further appeal for income-focused investors.

Looking ahead, OpenText stock is banking on a strong second half of its fiscal year, supported by its cloud and AI initiatives. Management has emphasized its commitment to improving organic growth rates and returning to its historical efficiency levels. Furthermore, the company’s long-standing relationships with marquee clients position it well for sustained success in the highly competitive information management space.

Bottom line

OpenText stock is a solid option for those looking to invest in a company with strong fundamentals, a commitment to shareholder returns, and promising growth initiatives. While it may take time for these strategies to fully materialize, the current valuation, combined with the dividend and buyback program, makes OpenText stock worth considering for both value and income investors.