12 Years of Dividend Growth and This Tech Stock Is Just Getting Started

Enghouse Systems Limited (TSX:ENGH) is being conservative with its payout and debt ratio. It’s an excellent purchase for investors seeking stable and long-term growth.

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For income-seeking investors, there’s no better indication of stability and value than a track record of expanding dividends. Multiple years of dividend increases indicate that a company’s culture, financial strategy, and market outlook are all aligned with shareholders’ best interest.

Dividends are, in fact, a great indicator of market-beating returns. The American Dividend Aristocrats Index, which tracks companies that have consecutively increased dividends for 25 years or more, has outperformed the S&P 500 by 1.5 percentage points over the past decade.

A Canadian firm that seems to be heading for the same streak of payouts is Markham-based software services company Enghouse Systems (TSX:ENGH). Enghouse’s quarterly dividends have been expanded for each of the past 12 years. In its most recent update, management boosted the payout amount by 22%.

Shareholders can now expect a quarterly income of $0.11 per share, indicating a dividend yield of 1.36% at the current market price.

It’s worth noting that Enghouse’s dividend yield is actually lower than the yield on a 10-year Canadian government bond at the moment. However, that less-than-attractive yield isn’t a consequence of an unreasonable valuation or lack of profitability, but rather the company’s fiscal conservatism.

Management has decided to payout less than a third of annual net earnings in dividends. The company has over $190.54 million in cash and cash equivalents on its book, which covers the annual payments nearly eight times over. In other words, Enghouse can afford its current dividend for nearly a decade without any income.

What makes the company even more attractive is its intrinsic growth rate. Enghouse’s operations are split between two segments: Interactive Management (technology products to enhance  customer service, increase efficiency and manage customer communications) and Asset Management (investments in technology service products and companies that operate in the same niche industry).

Management tends to reinvest cash in core technologies to augment them with research and fresh intellectual property, while the rest is reserved for acquisitions in the Asset Management segment, such as the recent takeover of Swedish e-ticketing provider Telexis Solutions.

The confluence of both strategies has driven the company’s return on equity (ROE) up to 19.45%. Total revenue is up 56% over the past five years, while adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) has nearly doubled over the same period.

Considering the fact that Enghouse has limited debt (21% of equity), the ROE is a good proxy for the company’s potential growth in the future. Meanwhile, the stock trades at 28 times annual earnings per share, which indicates a fair value for the nearly 20% annual growth potential.

Bottom line

Enghouse’s acquisition and conservative dividend strategy has been great for long-term shareholders. The stock’s total return since its initial offering has been phenomenal.

The 12-year dividend-growth streak puts it in an exclusive club of potential Dividend Aristocrats. If it can keep executing its customer acquisition, research, and mergers strategy with the same rigor, there’s no reason to doubt that it can sustain this dividend growth for the foreseeable future. 

The company’s low debt, financial strength, fair valuation, growth potential, and low payout ratio make it an excellent investment opportunity for investors willing to look beyond the dividend yield.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vishesh Raisinghani has no position in any of the stocks mentioned.

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