Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Enghouse Systems Limited (TSE:ENGH) is about to go ex-dividend in just 4 days. This means that investors who purchase shares on or after the 14th of May will not receive the dividend, which will be paid on the 31st of May.
Enghouse Systems's next dividend payment will be CA$0.16 per share. Last year, in total, the company distributed CA$0.64 to shareholders. Based on the last year's worth of payments, Enghouse Systems has a trailing yield of 1.1% on the current stock price of CA$56.73. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! As a result, readers should always check whether Enghouse Systems has been able to grow its dividends, or if the dividend might be cut.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Fortunately Enghouse Systems's payout ratio is modest, at just 30% of profit. A useful secondary check can be to evaluate whether Enghouse Systems generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 17% of its cash flow last year.
It's positive to see that Enghouse Systems's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. That's why it's comforting to see Enghouse Systems's earnings have been skyrocketing, up 26% per annum for the past five years. Earnings per share have been growing very quickly, and the company is paying out a relatively low percentage of its profit and cash flow. This is a very favourable combination that can often lead to the dividend multiplying over the long term, if earnings grow and the company pays out a higher percentage of its earnings.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Enghouse Systems has delivered 23% dividend growth per year on average over the past 10 years. It's exciting to see that both earnings and dividends per share have grown rapidly over the past few years.
Should investors buy Enghouse Systems for the upcoming dividend? Enghouse Systems has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Overall we think this is an attractive combination and worthy of further research.
So while Enghouse Systems looks good from a dividend perspective, it's always worthwhile being up to date with the risks involved in this stock. To that end, you should learn about the 2 warning signs we've spotted with Enghouse Systems (including 1 which shouldn't be ignored).
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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