Dividends play a key role in compounding returns over time and can form a large part of our portfolio return. Historically, Enghouse Systems Limited (TSE:ENGH) has paid dividends to shareholders, and these days it yields 1.0%. Does Enghouse Systems tick all the boxes of a great dividend stock? Below, I’ll take you through my analysis.
5 checks you should use to assess a dividend stock
When assessing a stock as a potential addition to my dividend Portfolio, I look at these five areas:
- Does it pay an annual yield higher than 75% of dividend payers?
- Has it consistently paid a stable dividend without missing a payment or drastically cutting payout?
- Has it increased its dividend per share amount over the past?
- Does earnings amply cover its dividend payments?
- Will it be able to continue to payout at the current rate in the future?
How well does Enghouse Systems fit our criteria?
Enghouse Systems has a trailing twelve-month payout ratio of 33%, meaning the dividend is sufficiently covered by earnings. In the near future, analysts are predicting lower payout ratio of 26%, leading to a dividend yield of 1.0%. However, EPS should increase to CA$2.35, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When considering the sustainability of dividends, it is also worth checking the cash flow of a company. Cash flow is important because companies with strong cash flow can usually sustain higher payout ratios.
If dividend is a key criteria in your investment consideration, then you need to make sure the dividend stock you’re eyeing out is reliable in its payments. Not only have dividend payouts from Enghouse Systems fallen over the past 10 years, it has also been highly volatile during this time, with drops of over 25% in some years. This means that dividend hunters should probably steer clear of the stock, at least for now until the track record improves.
Compared to its peers, Enghouse Systems generates a yield of 1.0%, which is on the low-side for Software stocks.
Now you know to keep in mind the reason why investors should be careful investing in Enghouse Systems for the dividend. On the other hand, if you are not strictly just a dividend investor, the stock could still be offering some interesting investment opportunities. Given that this is purely a dividend analysis, I urge potential investors to try and get a good understanding of the underlying business and its fundamentals before deciding on an investment. I’ve put together three key aspects you should further research:
- Future Outlook: What are well-informed industry analysts predicting for ENGH’s future growth? Take a look at our free research report of analyst consensus for ENGH’s outlook.
- Valuation: What is ENGH worth today? Even if the stock is a cash cow, it’s not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether ENGH is currently mispriced by the market.
- Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.