Is the Micro Focus 7.5% yield too good to pass up now?

Should contrarian investors grab this opportunity to invest in high-yield, long-term winner Micro Focus International plc (LON: MCRO)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

After a very poor trading update released last week spooked the market, shares of Micro Focus (LSE: MCRO) now offer investors a whopping 7.8% yield on a trailing basis. For income-starved investors, the question is whether this yield is too good to pass up or too good to be true?

The bad news is that the company’s policy of paying out a dividend that’s twice covered by after-tax profit means a substantial downgrade to earnings this year could see management rightfully cut the dividend. However, Micro Focus has also made much of its record of increasing dividends annually for over a decade. So it wouldn’t be unimaginable for management to maintain payouts even without being covered by earnings, as they did in H1.

The company’s balance sheet could take the hit of one year of uncovered earnings. Although net debt was 3.1x adjusted EBITDA, as of H1 results, this was already down from 3.3x immediately following the debt and equity-funded acquisition. This shows the underlying business remains cash flow positive despite the recent problems.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

On a recent conference call with lenders, its CFO also disclosed he still expects the group’s leverage to fall to the target 2.7x next year. On top of this, the group’s term loans have no covenants and it has no repayments due until 2021, which gives management some leeway in delaying reaching deleveraging targets.

Now whether this makes Micro Focus a screaming buy right now is far from clear. The group has a long history of taking mature software assets and vigorously cutting costs. It still sounds as if cost cutting at HPE is going well with the recent sales and profit warning due almost entirely to self-inflicted IT problems and the loss of salespeople.

If the group can get a handle on these issues there’s plenty of money to be made for shareholders. But with further acquisitions off the table while the HPE problems are digested, I’d urge patience while we see what management’s plan to get things back on track looks like.  

Gloomy days ahead?

Another troubled company that’s offering a knockout dividend is DFS Furniture (LSE: DFS) and its 6.6% yield. Unfortunately for shareholders, DFS’s problems don’t relate to fixable, short-term internal screw-ups. Instead, it’s rather broader industry-wide trends that include the weak pound dampening margins, sales declines as shoppers embrace e-commerce, and weak consumer confidence.

These factors collided in the group’s H1 to send pre-acquisition revenue down 3.5% to £366.5m, while pre-tax profits fell from £16.7m to £7m on the same basis. All is not lost as the CEO sounded a rather positive note about strengthening trading at the start of H2 and maintained guidance for a small uptick in underlying EBITDA for the year.

However, I see plenty of issues that will stop me from buying DFS’s shares right now. The first problem is the aforementioned headwinds facing most brick & mortar retailers. Then there are DFS’s low margins and rising net debt that hit 2.17 times underlying EBITDA at period end following a small bolt-on acquisitions. While its shares may trade at only 9 times earnings, fast-falling profits and rising debt, together with a weak outlook, leave me thinking it could be a big mistake to sink money into DFS right now. 

5 Shares for the Future of Energy

Investors who don’t own energy shares need to see this now.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — sees 2 key reasons why energy is set to soar.

While sanctions slam Russian supplies, nations are also racing to achieve net zero emissions, he says. Mark believes 5 companies in particular are poised for spectacular profits.

Open this new report5 Shares for the Future of Energy — and discover:

  • Britain’s Energy Fort Knox, now controlling 30% of UK energy storage
  • How to potentially get paid by the weather
  • Electric Vehicles’ secret backdoor opportunity
  • One dead simple stock for the new nuclear boom

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce owns shares of Micro Focus. The Motley Fool UK has recommended Micro Focus. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Front view of a young couple walking down terraced Street in Whitley Bay in the north-east of England they are heading into the town centre and deciding which shops to go to they are also holding hands and carrying bags over their shoulders.
Investing Articles

Up 15% in a month and still yielding 9.5% – this FTSE second income stock is on fire!

Harvey Jones says wealth manager M&G offers one of the most exciting second income streams on the entire FTSE 100.…

Read more »

Wall Street sign in New York City
Investing Articles

Looking for cheap stocks to buy? 2 reasons now might be the ideal moment!

Amid market turbulence, our writer has not been diving for cover, but actively on the hunt for stocks to buy…

Read more »

Woman riding her old fashioned bicycle along the Beach Esplanade at Aberdeen, Scotland.
Investing Articles

These 2 FTSE 250 stocks now yield more than 10% – is that income sustainable?

Harvey Jones is astonished to discover how much dividend income investors can get from FTSE 250 stocks. These two have…

Read more »

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

3 promising high-yield FTSE 250 stocks to consider buying right now!

When hunting for lucrative high-yield dividend shares, our writer heads straight for those smaller-caps found in the UK's secondary index,…

Read more »

Tesla building with tesla logo and two teslas in front
Investing Articles

Are Tesla shares now a brilliant long-term opportunity?

Tesla shares have been pummelled by the markets so far this year. Our writer thinks they may have a lot…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 22% in a month, has the Rolls-Royce share price restarted its incredible rise?

Even after a storming few years, the Rolls-Royce share price has leapt over a fifth in just one month! Is…

Read more »

Santa Clara offices of NVIDIA
Investing Articles

I’ve been eyeing Nvidia stock, but I just bought this chip giant instead

After a recent fall in the price of Nvidia stock, this writer was considering it but decided to buy a…

Read more »

ISA Individual Savings Account
Investing Articles

Why I don’t hold cash in my Stocks and Shares ISA

Stephen Wright explains why he’s fully invested in his Stocks and Shares ISA – and why he intends to keep…

Read more »