Does 75% dividend rise make Micro Focus International plc the best income stock around?
Finding fast growing dividend stocks can be tough. After all, a number of companies have increased their payout ratios in recent years and are now facing an uncertain future thanks to Brexit. However, Micro Focus(LSE: MCRO) has today announced a 75% rise in its dividend. Could this make it the most enticing income play in the FTSE 350?
Micro Focus has reported a strong set of first-half results. Revenue increased by 14% on a constant currency basis, while underlying adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) was almost 21% up on the same period of the prior year.
Part of the reason for this was the effect of acquisitions. On a like-for-like basis, revenues grew by 1.2% and were driven by strong performance of the SUSE Product Portfolio where revenues increased by over 23%. And with a reduced rate of decline in the Micro Focus portfolio, the overall performance of the business has been encouraging.
As a result of its first-half performance, Micro Focus has raised dividends by 75.5% to $0.30 per share. This is in line with the company's policy of the full-year dividend being twice covered by adjusted earnings. As such, this leaves scope for significant reinvestment in the business as well as providing a higher income return for its investors.
Although the company currently yields just 2.6%, dividends could be due to rise substantially over the medium term. The acquisition of HPE is expected to complete in the third quarter of 2017 and this could have a major impact on Micro Focus's earnings and dividends. It has the potential to transform the company in the same way as the Attachmate acquisition did in 2014, with higher profitability and shareholder payouts likely as synergies begin to be delivered.
The best income stock around?
However, where Micro Focus lacks appeal compared to popular income shares such as National Grid (LSE: NG) is with regard to its yield. At 2.6% it's 220 basis points lower than that of the utility company. Given that inflation is expected to rise significantly in 2017, there's a danger that Micro Focus's yield will turn negative on a real terms basis over a relatively short timescale. In other words, inflation may be higher than its yield next year.
As a result, National Grid remains a significantly better income share. Not only does it have a high yield, it's also aiming to raise dividend payments by at least as much as inflation over the medium term. This should provide its investors with protection if sterling continues to weaken and inflation moves higher than forecast. And with National Grid having a more stable business model than Micro Focus - especially with the risks the latter faces regarding the acquisition of HPE next year - the utility company is a better option for income investors at the present time.
But is this an even better dividend stock?
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Peter Stephens owns shares of National Grid. The Motley Fool UK has recommended Micro Focus. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.