This Beaten-Down TSX Stock Yields 4.5%, and I’d Double Down for $448 Today

A profitable, cash-rich software company is yielding 4.5% while trading 38% below its high, and management is buying back shares.

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Key Points
  • OpenText’s dividend looks well supported because free cash flow rose to over US$800 million this year.
  • Cloud bookings are growing and the company wants to use enterprise data management as an AI tailwind.
  • The stock is down sharply and carries debt, so a recovery depends on improving organic recurring revenue growth.

A technology stock producing rising earnings, more than US$800 million in free cash flow, and a growing dividend doesn’t normally end up in the bargain aisle.

This one did.

Its shares remain nearly 38% below their 52-week high, even as the company buys back stock and prepares to turn decades of business data into fuel for artificial intelligence (AI). That tension is why I’d add another $10,000 today for approximately $448 in annual income.

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.

Source: Getty Images

A different tech stock

Technology investing usually asks shareholders to accept little income in exchange for faster growth. A mature software company can offer both because customers pay recurring subscription and support fees, while distributing software costs far less than manufacturing another truck or opening another store.

The dividend still needs proper coverage, so investors should compare the payment with free cash flow, which is the cash remaining after a company funds its operations and capital spending. A falling share price can lift the yield, but it doesn’t make a strained dividend any safer.

The more attractive setup is a rising yield paired with improving cash generation, leaving room for dividends, debt repayment, and compound growth. But with that in mind, let’s look at this anything-but-average tech stock.

The data behind AI

OpenText (TSX: OTEX) provides software that helps large organizations store, secure, organize, and use their information. Its products cover content management, cybersecurity, business networks, and cloud services. Those may sound like chores best assigned to the office basement, yet AI models can’t produce useful answers when a company’s data is scattered, unsecured, or labelled “Final_Final_UseThisOne.”

OpenText stock’s fourth-quarter revenue rose 2.9% to US$1.4 billion, while cloud revenue increased 6%. Enterprise cloud bookings climbed 24.1%, showing that customers are committing more money to future cloud contracts. The full fiscal year produced US$808 million in free cash flow, up 17.5%, giving the dividend a much sturdier floor than the share chart suggests.

Management returned US$677 million through dividends and buybacks during the year. It has now renewed a program allowing OpenText stock to repurchase up to approximately 23.8 million shares beginning August 12. Buying back stock after a major decline reduces the share count more efficiently, allowing each remaining share to represent a slightly larger piece of the business. Investors can effectively shop beside management while the sale remains open.

What $10,000 buys

At a recent $34.74 close, OpenText stock sat nearly 38% below its $56 52-week high. Its latest quarterly dividend equals approximately $1.56 annually, producing a 4.5% yield. Investing another $10,000 would buy 287 whole shares.

COMPANYRECENT PRICENUMBER OF SHARESANNUAL DIVIDENDANNUAL TOTAL PAYOUTFREQUENCYTOTAL INVESTMENT
OTEX$34.74287$1.56$447.72Quarterly$9,970.38

Reinvesting each payment while the shares remain depressed could add more units before a recovery, making this an unusual income option among Canadian technology stocks.

But there are risks. OpenText stock still carries acquisition-related debt, while annual recurring revenue grew only 1.3%. AI competitors could also move faster, and management’s promise of better organic growth still needs to appear in reported results. OpenText stock can’t cost-cut and repurchase its way to prosperity forever; customers must keep choosing its cloud and AI tools.

Bottom line

I’d double down gradually because OpenText stock’s 4.5% yield is backed by rising annual free cash flow, while cloud bookings, AI investment, and a large buyback provide three paths toward recovery. If management converts those bookings into stronger recurring growth, investors who collected roughly $448 while waiting may discover that the market left a profitable software business in the bargain aisle for far too long.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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