Micro Focus International (LON: MCRO) shares were punished heavily by the market yesterday.
The £9.3bn market cap company, which helps clients merge new technology solutions with existing IT infrastructure, released half-year results which missed analysts’ expectations. The stock closed down 17%.
While reported revenues were 80% higher for the period thanks to the recent Hewlett Packard Enterprises (HPE) software acquisition, revenues for the existing Micro Focus business were 2.9% lower. Adjusted EBITDA was 4.1% lower. The company said that it has put operational improvement plans on hold while working on the completion of the HPE acquisition.
The 17% share price fall is representative of the market’s mood right now. While growth stocks with momentum continue to surge, anything resembling a profit warning gets punished.
So has Micro Focus’ share price decline created an attractive entry point or is it time to steer clear?
Strong dividend growth track record
Micro Focus has been on my watchlist for a while now.
As a dividend growth investor, the stock’s dividend growth track record interests me. While MCRO’s yield is not super high, the payout has been increased at an impressive rate. Over the last decade, the dividend has been increased from 10 cents to 88 cents. That kind of dividend growth can produce strong total returns over the long term.
16.4% dividend increase
One thing that stands out to me from yesterday’s half-year results was the 16.4% hike in the dividend. To my mind, that’s a strong statement about future prospects from management.
Normally, if a company is struggling, you’re lucky to see any dividend growth at all. Even companies that have fantastic momentum usually only increase their dividends by 10% or so.
So a 16.4% dividend hike is significant. It suggests to me that a 17% fall in the share price may have been a short-term overreaction.
Yesterday’s share price decline has left the stock trading on a forward P/E of 13.8, with a prospective dividend yield of 3.5%, metrics that look attractive for a technology-based growth stock.
Of course, it can be dangerous to buy immediately after a profit warning. Quite often, we see a further profit warning a few months later. A good example is Provident Financial last year. It was the second profit warning that did the real damage.
For this reason, I’m going to refrain from buying the stock right now and keep Micro Focus on my watchlist. I think it’s probably wise to let the dust settle before buying the shares. However, the 16.4% rise in the dividend has definitely piqued my interest.
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.