Down 22%, This Magnificent Dividend Stock Is a Screaming Buy

OpenText stock may be known for its tech innovations, but it’s also a top dividend stock that investors should snap up.

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 December 3, 2024 9:00 pm EST

| More on: OTEX

OpenText (TSX:OTEX), a global leader in information management, has seen its stock price tumble by 22% over the past year. Yet this dip presents a potentially lucrative buying opportunity for long-term investors. As the company positions itself for sustainable growth, a closer look at its recent performance, strategic initiatives, and future outlook reveals a compelling investment case.

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Recent performance

OpenText’s financial performance underscores its resilience in a challenging tech market. For fiscal 2024, the company reported revenues of $5.8 billion. A notable 28.6% increase year-over-year. Annual recurring revenue reached $4.5 billion, up 25.4%, with cloud revenues growing by 7.1% to $1.8 billion. These figures highlight OpenText’s ability to generate consistent income streams, particularly through its robust cloud offerings. These are central to its growth strategy. The company is targeting 2–5% cloud revenue growth this fiscal year, with aspirations for even stronger growth in the years ahead.

The recent integration of Micro Focus, acquired in January 2023, has significantly expanded OpenText’s product portfolio and customer base. This strategic acquisition, though initially challenging due to rising interest rates, is now bearing fruit. OpenText removed over $500 million in costs and reduced its workforce by 4,000 as part of a broader restructuring plan. This optimization has already improved operational efficiency and bolstered margins, putting the company on track to restore its pre-acquisition financial performance levels.

Further strengthening its balance sheet, OpenText divested its Application Modernization and Connectivity (AMC) business for $2.3 billion. This divestiture not only aligned with the company’s strategic focus but also allowed it to reduce debt by $2.8 billion. By slimming down its operations and focusing on core areas like artificial intelligence (AI), cloud, and cybersecurity, OpenText is sharpening its competitive edge in the global software market.

What to watch

The company’s commitment to shareholders is evident in its capital return strategies. OpenText recently announced a new $300 million share repurchase program and increased its annual dividend by 5% to $1.05 per share. With a forward dividend yield of approximately 3.5%, the company offers investors a steady income stream, further enhancing its appeal as a long-term investment.

Despite recent stock price declines, OpenText stock’s valuation metrics suggest it is trading at an attractive level. The forward price-to-earnings (P/E) ratio is 8.2, which is significantly lower than many of its tech peers, indicating strong value relative to its earnings potential. The enterprise value-to-earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 7 further underscores its favourable valuation, especially for a company with such a diversified portfolio and strong cash flows.

What’s more, the company’s profitability metrics remain strong, with a trailing 12-month net income of $468.6 million and a profit margin of 8.4%. Operating cash flow of $842.8 million and levered free cash flow of $928.01 million demonstrate OpenText’s ability to generate substantial cash, ensuring it can fund growth initiatives while continuing to return capital to shareholders.

Foolish takeaway

Looking ahead, OpenText expects stronger performance in the second half of its fiscal year, driven by increased cloud bookings and growth in its AI-powered solutions. The company’s long-term strategy includes scaling its cloud offerings, leveraging AI to enhance customer experiences, and maintaining disciplined cost management to maximize profitability. These initiatives are well-aligned with the broader trends in the information management space. And this is projected to see sustained demand in the coming years.

For investors, the current dip in OpenText stock’s price may represent an excellent entry point. With a strong balance sheet, growing recurring revenues, commitment to innovation, and shareholder-friendly policies, OpenText stock is well-positioned to deliver value over the long term. As the company continues to execute on its strategic priorities, those who invest now may find themselves rewarded as the stock rebounds and the business capitalizes on its growth opportunities.