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  5. OTEX: OTEX is closing in on my technical buy area. [Open Text Corporation]
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Q: OTEX is closing in on my technical buy area. I've read previous Q&A and I realize there is currently negative price action, which doesn't really bother me as a long term buy and hold - unless you see red flags. Just want to make sure about a few things.

Does present cashflow make the debt levels manageable ? How about compared to debt-laden sectors such as utilities and telcos - say, during "tough times".

Is payout ratio really 161% ?

What is your confidence level in management ?
Asked by James on June 05, 2024
5i Research Answer:

OTEX is a $10.3B company with a net debt balance of $7.5B. It generates roughly $750M in free cash flows per year, of which $265M are used towards dividends, $75M towards share buybacks, leaving about $400M towards debt reduction or acquisitions. 

Right now its net debt/EBITDA is 4.6X, above what we would consider a healthy ratio of 3.5X. To get to the 3.5X, OTEX would need to be pay down about $2B in debt, which under current assumptions would take approximately four years. 

Compared to telcos and some utilities, we feel OTEX's ability to service its dividend is much better, and being a tech company, it could reduce its dividend, reinvest in growth, and potentially grow fast enough to pay down its debts faster, but this involves an investor-base change as many that hold it for its dividend would likely begin to sell. 

Its dividend payout ratio using the traditional metrics of dividend / EPS is roughly 160%, but we prefer to use dividends / free cash flow, as this is a more realistic measure of how the company can finance its dividends, and this ratio is 35%. 

We like the management team, it has been around for a while as a successful company, but it has faced some weakness over the past few years.