It’s been several months since I last covered Micro Focus International (LSE: MCRO) and sounded a positive note on the earnings prospects of the software star.
So I was shocked when the FTSE 100 company sent investors stampeding for the exits by scaling down its revenues forecasts on the back of problems related to integrating Hewlett Packard’s Enterprise’s (HPE) software unit. To add to the turbulence, chief executive Chris Hsu fell on his sword with immediate effect of the announcement.
March’s scary update was the second profit warning it had issued in the same number of months, Micro Focus warning that “the rate of year-on-year revenue decline has been greater than anticipated” since its January 8 update and that, consequently, full-year revenues would likely fall between 6% and 9% versus its previous forecast of a 2%-4% fall made at the top of the year.
Too much risk
That was quite some downgrade and, while May’s subsequent trading update contained no fresh horrors, it is likely to take some time and no little effort for Micro Focus to sort out the problems related to the fumbled takeover of HPE. This could merely be a stay of execution.
Despite its problems, the City is expecting earnings at the business to rise 5% and 6% in the years to October 2018 and 2019 respectively. I reckon additional downgrades could be just around the corner, however, given its sales execution problems and the rate at which its salesforce is contracting, factors that make the firm an unappealing pick despite its low forward P/E ratio of 9.2 times.
What’s more, Micro Focus’s uncertain earnings outlook married with its colossal debt pile (which the company expects to remain around the $4.2bn marker come October) means that investors should expect projected dividends to fall by the wayside too. There have been projections of 93.6 US cents per share for this year and 98.4 cents for fiscal 2019, and yields of 5.2% and 5.5%, but that should change.
A superior dividend selection?
Those with a low risk-tolerance may want to consider stashing the cash in National Grid (LON: NG) instead.
The defensive attributes of the business, which runs the electricity network in the UK, are not difficult to see. And as my Foolish colleague Rupert Hargreaves recently mentioned, National Grid’s expansion into North America gives its terrific long-term earnings visibility an extra shot in the arm and also scales down the impact of any potential regulatory speed bumps in its home market.
Such visibility is a necessity for all serious income investors, although some bottom-line bumps happen now and again due to the colossal costs it endures in order to keep the country’s lights on.
Indeed, a 4% profits dip is forecast for the 12 months to March 2019. But the power play is expected to bounce back from this predicted hiccup with a 7% advance in fiscal 2020.
As a consequence, dividends at National Grid are expected to continue their long northwards trek. Last year’s 45.93p per share reward is expected to advance to 47.1p this year and again to 48.5p in the following period. This means share pickers can enjoy giant yields of 5.6% and 5.8% for fiscal 2019 and 2020 respectively.
When you bung a low forward P/E ratio of 14.6 times into the equation, I reckon the Footsie firm is worthy of serious consideration right now. But it isn’t the only top-drawer dividend bet in the FTSE 100…
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Royston Wild has no position in any of the shares mentioned. 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.