It is rare to find a blue-chip FTSE 100 stock that offers both a high level of dividend income and the potential for substantial capital gains. But there are a handful of these companies out there, and one such business I’m going to profile is Micro Focus International (LSE: MCRO).
I’ll admit I haven’t always been positive on the outlook for this technology business. Last year, I thought Micro Focus was struggling to survive and should be avoided following its multi-billion dollar acquisition of HP’s software business, which was failing to live up to expectations.
As City analysts revised their growth expectations for the company lower, I was worried the group would soon be overwhelmed by its debt.
Around a year on, it looks as if Micro Focus has successfully navigated this rough patch. 2018 turned out to be a landmark year for the company as, while growth wasn’t as robust as some analysts initially expected, earnings per share still lept 68% year-on-year.
And this year analysts are expecting the firm to report yet another period of robust growth. Analysts are now expecting Micro Focus’s earnings to hit $2.36, up 18% year-on-year.
Back in November, analysts were only predicting earnings of $2.00 for 2019, which tells me the City’s view of the business has improved substantially over the past eight-to-nine months. Current forecasts also suggest earnings could hit $2.63 by 2020.
It looks as if MCRO is well on the way to meeting this target. According to it first-half results, core group earnings rose 1.8% to $662m, as management squeezed more profit from the group’s legacy software products. However, more importantly, management believes the firm’s restructuring and growth plan is now firmly back on track. While revenue fell 5.3% to $1.7bn, that was in line with market expectations.
Double your money
Based on the numbers above, shares in Micro Focus are currently dealing at a forward P/E of 11.1 for 2019, falling to just under 10 for 2020. In my opinion, these multiples undervalue the business and its prospects. Indeed, the rest of the UK the Software & IT Services Industry is currently dealing at a median P/E of around 19.1, nearly double the stock’s current multiple.
According to my calculations, based on the City’s current growth estimates for the company, a sector-average multiple would leave it trading at more than 3,500p, around 70% above current levels.
If the company continues to report double-digit earnings growth, then I see no reason why the stock cannot hit this target over the medium to long term.
Growth is just one part of the equation here. There’s also the company’s dividend to consider. At the time of writing Micro Focus supports a dividend yield of 4.4% and analysts expect this to hit 4.9% by 2020.
These estimates predict Micro Focus will distribute around $2.43 in dividends over the next two years, or around 190p. Including this income, I reckon this stock could produce a total return of 80% for investors over the next few years.
So, if you’re looking for an FTSE 100 stock that has the potential to nearly double your money over the next few years, I highly recommend taking a closer look at Micro Focus.
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Rupert Hargreaves owns no share 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.