Get a 21% cash return in 15 months with Micro Focus

Not only will the shares be paying a 21.8¢ (18p) per share final dividend in October (the shares go ex-dividend on 4 September), but management has decided - subject to shareholder approval - to return a further 60p a share in November by way of a special share scheme. The company intends to make a similar cash return to shareholders in November 2014, too, barring "a significant acquisition, a share buy-back opportunity of unforeseen circumstances".

That means Micro Focus's shareholders stand to receive a whopping 167p worth of dividends over the next 15 months, assuming the two special cash returns are approved and Peel Hunt's forecast of a small hike in the total dividend this year proves accurate. At Micro Focus's current share price of 793p, that represents a thumping 21 per cent return through shareholder distributions alone - and that's before the strong potential for capital appreciation is considered.

Granted, this is all based on the assumption that Micro Focus will really go through with the payouts as announced. But this seems a fairly safe bet as management has stabilised the business following a credit-crunch induced slump allowing it to increase its dividend seven years in a row and made special distributions of 45p and 50p in 2011 and 2012 respectively, while also returning capital through share buy-backs.

Micro Focus is funding these impressive cash returns through strong cash generation coupled with canny financial management. A new four-year, $420m revolving credit facility signed this summer and the low interest-rate environment means Micro Focus sees more value in returning cash directly to shareholders than hanging on to it. So with net debt of just $146m (£93m) at the end of July, well short of the 1.5-times cash profit target, it can easily afford to return $140m in November with its special share scheme.

The company's strong financial position stems from its ability to deliver sustainable earnings year in, year out, via sales of its high-margin software. In the year to 30 April, for example, Micro Focus's cash profit margin was up 400 basis points to 45.4 per cent. That enabled the company to post growth in adjusted cash profits of 4.6 per cent to $188m despite a 4.8 per cent decline in reported revenue.

What's more, revenues now have the potential to start growing again aided by annual research and development spending of $50m. Management released a positive trading update two weeks ago and reiterated that revenues and adjusted cash profits in the first few months of the year were both in line with management expectations. The company expects overall revenues in the current year ending 30 April 2014 to grow in the range of 0-5 per cent year on year.

While that doesn't exactly set the heart racing, any top-line growth could prove significant for the share price. Numis Securities reckons even "adding 3 per cent growth into the mix potentially has a material valuation impact". With gentle growth, the broker thinks shares in Micro Focus should trade at about 15 times cash adjusted forward earnings and 13 times in a zero-growth scenario. The mid-way, cash adjusted rating of 14 times would give a price of 880p. Top-line growth isn't hard to imagine, especially as improving macroeconomic conditions in the US, where Micro Focus generates 46 per cent of sales, should boost demand.