Portfolio manager Margaret Samuel of Toronto-based Enriched Investing™ goes “fishing at high tide” for dividend-paying technology stocks.
Technology is a very loved sector. Generally I like to look for unloved stocks in loved sectors to find opportunities. However, the technology tide is lifting the vast majority of boats, so fishing in these waters requires focus.
History has shown that stocks paying dividends, particularly dividends that have been rising, tend to perform well with relatively lower volatility. Although typically technology stocks tend not to be known as dividend payers, there are a few and I will highlight four that would be sound additions to a diversified portfolio.
Open Text Corporation (TSX—OTEX; NASDAQ—OTEX)
In Canada, Open Text Corporation (TSX—OTEX; NASDAQ—OTEX) has been around for a long time. If you remember Nortel and Research in Motion and know that RIM is now Blackberry, you’ve probably seen a few boom-and-bust cycles that broke many tech-lovers’ hearts. In the heady days of Nortel and Research In Motion, Open Text was scoffed at as a shoe salesman’s stock. But it has proven the naysayers wrong and continues to amalgamate and grow to take advantage of prevailing trends.
Today, with the need for remote collaboration, it is well positioned to benefit from a virus-driven demand for the types of products that are core to its business model. For example, for the first time in the last few months, I have had to participate in many business meetings using Microsoft Teams, described as the world’s fastest-growing collaboration tool and an alternative to the popular Zoom.
On July 9, 2020, OTEX announced that its market-leading Content Services technology is available to be integrated with Microsoft Teams. The firm’s Chief Marketing Officer, Lou Blatt, explained that “integrating Enterprise Content Services into Teams makes it easier to access relevant documents while maintaining information governance and compliance policies”. In addition, Open Text leverages Microsoft Azure and integrates with additional Microsoft products.
While its dividend yield of 1.58 per cent is not eye-popping, over five years its dividend has grown almost 17 per cent. Although analysts have revised slightly downward their expectations for earnings over the next three months, Open Text’s cash flow has been growing at about 10 per cent, its return on equity, a measure of profitability, is a sound 20 per cent, and it is well-positioned to provide products required from the massive spike in the shift to remote work as a result of the COVID-19 outbreak.
Sylogist Ltd. (TSXV—SYZ)
Another Canadian technology stock that shows some promise is Sylogist Ltd. (TSXV—SYZ). It provides Enterprise Resource Planning (ERP) solutions for public service customers in Canada, the US and the UK. Some of these public service organizations are school districts and boards, international non-governmental organizations, non-profit organizations and the public sector.
SYZ provides intellectual property solutions and publishes mission-critical software products to satisfy the unique and sophisticated functionality requirements of its clients. SYZ distributes a dividend amounting to around 3.8 per cent that has been growing almost 12 per cent per year. Although its cash flow has declined recently, its profitability is sound, returning more than 20 per cent on equity, and its last earnings report was a surprise with earnings that exceeded the market’s expectation by almost three per cent.
Indeed, as its president and CEO Jim Wilson stated in a July 16, 2020, news release, SYZ has secured a $40-million credit facility to fund acquisitions which will allow it to maintain “industry-leading cash flow”. Mr. Wilson projects that as SYZ positions its “highly profitable platform for expansion, this credit will help accelerate Sylogist’s growth”.
Pivot Technology Solutions Inc. (TSX—PTG)
Pivot Technology Solutions Inc. (TSX—PTG) designs, integrates, implements and manages IT infrastructures and business processes to enable each of its 2,000 active clients to meet its unique need by accessing the most effective solutions. Its solutions help clients to optimize networks, modernize applications, strengthen security, and to optimize cloud transformation, workplace experience, edge transformation, business continuity and customer experience.
PTG has 400 different technology partners and a workforce of approximately 800 associates. Its five largest technology partners are Pure, NetApp, HPE, Cisco and Dell EMC. Clients are in the energy, finance, healthcare and retail sectors. Although analysts have reduced their expectations for its earnings over the next three months by about 12 per cent, the company pays a healthy dividend yielding about 9 per cent and cash flow has been growing at an aggressive clip of almost 70 per cent.
As Kevin A. Shank, President, CEO and director, reported at PTG’s annual meeting on June 24, 2020, the company over the last few years has integrated solutions and services, thereby moving “from just capturing the CapEx or transactional business” of its customers and “generating more services and reoccurring revenue from the OpEx [operating expense] spend” of its clients.
Mr. Shank further explains that they are adding “longer-term contracts with higher gross profit as a percentage of a dollar revenue, higher gross margin percent, and more reoccurring revenue”. The resulting increased quality of earnings will likely support a higher multiple.
With the sale of Smart Edge in October 2019, PTG is able to reduce its debt levels, while also improving adjusted EBITDA. In addition, Mr. Shank reports, a change in mix of customers has “led to increased gross profit and increased gross profit margins”. Its Return on Equity is around 57 per cent indicating healthy profitability and as indicated by the President and CEO, is expected to be supported by “tremendous growing opportunity as we round out the year 2020 and as we move into the year 2021”.
Activision Blizzard, Inc. (NASDAQ—ATVI)
In the entertainment industry, Activision Blizzard, Inc. (NASDAQ—ATVI) is an interactive entertainment company providing software and programming services and products. With almost 500 million monthly active users in 196 countries and more than 9000 employees, ATVI develops, distributes and publishes interactive entertainment and fan experiences for gaming consoles, mobile and tablet platforms and PCs. Some of its franchises are Candy Crush Saga®, Pet Rescue®, Overwatch® and World of Warcraft®.
With about 774 million shares outstanding, and first quarter revenues of $1.8 billion, ATVI generated $0.76 EPS and free cash flow of $129 million. ATVI pays a small dividend and has a reasonable P/E ratio of about 40x. Although the company’s earnings per share and sales have declined slightly over the last 12 months, in the current environment favouring staying at home, ATVI provides a product that allows for entertainment, complying with physical distancing targets and is benefiting as shown by its one-year share price increase of about 70 per cent.
Indeed, in its first quarter conference call, ATVI’s CEO Bobby Kotick stated: “We significantly exceeded our outlook for both revenue and earnings per share, we reached new highs for first quarter net bookings across the global console and PC, and we exited the quarter with accelerating engagement and momentum across the business as people around the world turned to our content for entertainment and connection.” Mr. Kotick added that “this momentum will likely continue for the second quarter”.
While these four stocks are part of a sector that has been leading the North American market, they may prove to be growing fish worthy of being caught in your net at high tide.
Margaret Samuel can be contacted at firstname.lastname@example.org. She or clients of Enriched Investing™ may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain projections or other “forward-looking statements”. There is significant risk that forward-looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
This is an edited version of an article that was originally published for subscribers in the August 2020/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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