Should You Buy Open Text Corp. for High Dividend Growth?

This first appeared as 1 of 3 top US dividend ideas for September 2017 in the Seeking Alpha Marketplace service DGI Across North America.

Open Text Corp. (TSX:OTEX)(NASDAQ:OTEX) is a mid-cap technology company, which has been growing by acquisitions in the expanding industry of enterprise information management. It is a global leader that offers software applications and cloud services in managing data.

Open Text strong long-term total returns

Source: August presentation (pdf)

Shares Experienced a Meaningful Dip

The stock has dipped about 15% on the Toronto Stock Exchange since April. This is partially because of a stronger Canadian dollar against the USD, as the company reports in USD. So, interested Canadian investors should take advantage of a stronger loonie and pick up some shares for technology exposure.

For U.S. or Canadian investors, the stock offers above-average growth (and dividend growth) at a low multiple. At ~US$32.30, it trades at a multiple of roughly 15 and a forward multiple of roughly 13, which is attractive for the analyst consensus’s estimated 3-5 year earnings per share growth rate of 19.7% for the company.

Some reasons the stock trades at a cheap multiple are that it has an S&P credit rating of BB+ (which is two notches below the investment-grade rating of BBB-) and it grows partly by acquisitions, which have a potential of not working out as planned.

That said, the company has consistently executed well over a long time. And at the current valuation, it could very well return ~20% in the next 12-18% months.

Notably, U.S. investors will have a 15% non-resident withholding tax on the dividend unless they hold the shares in a retirement account. But the dividend is only worth a small part of the anticipated return because the stock only yields ~1.6%.

Open Text has delivered double-digit dividend growth in the last few years. And it’s capable of continuing to increase its dividend at 10-15% for the next few years.

Finviz shows an analyst consensus target price of US$40 on the stock, which represents nearly 24% upside potential.

Investor Takeaway

The meaningful dip from the recent high brings Open Text to an attractive valuation for purchase. If management integrates new acquisitions well and executes on the double-digit growth expectations, the shares could appreciate 20% in the next 12-18 months.

Open Text is also a dividend growth star in the making. It has increased its dividend per share for four consecutive years, and its three-year dividend growth rate is 15.5% (based on its U.S. dollar-denominated dividend, which is an eligible dividend for Canadian investors).

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Disclosure: At the time of writing, I’m long OTEX.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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