Micro Focus International offers dividend growth appeal

Micro Focus Shares Dividend

Tech stocks aren’t usually associated with significant dividend payments. Most tech companies prefer to reinvest their profits in pursuit of further growth, instead of rewarding shareholders with a share of the profits.

However, one UK-based tech stock that looks to have interesting dividend appeal at present is FTSE 100 listed Micro Focus International (LON: MCRO) (MCRO.L).

Micro Focus is a global software company that specialises in helping its clients merge new technology solutions with existing IT infrastructure. Just last week, the company completed the acquisition of Hewlett Packard Enterprises’ (HPE) software business, and the combined entity will make it one of the world’s “largest pureplay infrastructure software companies.”

Impressive dividend growth history

The company has an impressive dividend growth history, having increased its dividend from 10 cents to 88 cents over the last decade.

A snapshot of the last five year’s payments is shown below. As you can see, the dividend growth has been prolific.

Micro Focus Dividend Growth

Source: Hargreaves Lansdown

Dividend paid in US dollars

It’s worth noting that the company reports in US dollars and therefore declares its dividends in US dollars as well. That means UK investors face currency risk – if the pound strengthens against the dollar, the UK payout is worth less.

For example, last year Micro Focus paid out dividends of 88 cents per share. At the current GBP/USD exchange rate of 1.30, that equates to a GBP payout of 67.8p, which at the current share price of 2,210p, is a dividend yield of 3.1%. However, if the pound miraculously bounces back to 1.50 US dollars, that 88 cents would only be worth 58.7p, so the yield would be 2.7%. This is clearly an issue to be aware of, especially if you depend on your dividend income for living expenses.

City analysts expect a payout of $1.03 for FY2018, growth of 17%, which at the current exchange rate and share price, equates to a yield of a healthy 3.6%. Earnings are expected to come in at $1.95 per share, which gives a dividend coverage ratio of a robust 1.90.

Potential for dividend growth and capital growth

One negative is the company’s debt pile, which is set to expand significantly as a result of the HPE acquisition, however, on a forward looking P/E ratio of 14.7, the stock doesn’t look expensive, given its track record of generating shareholder wealth.

While revenue growth is forecast to be flat this year, management is confident about the future, stating in July:

Micro Focus sets out to deliver consistent long-term shareholder returns of between 15% and 20% per annum. The board is confident that medium-term low single digit revenue growth, industry leading margins and strong cash conversion will ensure that Micro Focus can deliver on that strategy. These returns can be further enhanced by the appropriate deployment of capital in value enhancing acquisitions.”

As a result, Micro Focus International appears to have potential for both dividend growth and capital growth going forward, in my view.

Disclosure: Edward Sheldon, CFA has no position in Micro Focus International. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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