Investing in dividend stocks is quite tricky. Generally, most investors look to buy dividend stocks that offer a high yield and ignore company fundamentals. However, it’s essential to understand that dividend payouts are not guaranteed and can be revoked or lowered at any time.
In the last two years, macro headwinds such as rising interest rates and inflation forced several high-dividend stocks across sectors such as energy, utilities, and real estate to lower their dividend payouts.
Instead, it makes sense to identify companies that are positioned to grow dividends each year due to widening cash flows, enhancing the yield-at-cost over time. Here is one such incredible dividend-growth stock to buy hand over fist in 2024.
An overview of Enghouse Systems
Valued at a market cap of $1.66 billion, Enghouse Systems (TSX:ENGH) stock is up over 120% in the last years, after adjusting for dividends. However, the TSX tech stock is also trading 63% below all-time highs, allowing you to buy the dip and benefit from a tasty yield of 3.5%.
Enghouse Systems develops enterprise-facing software solutions. It has two primary business segments that include the following:
- Interactive Management Group: This business provides consumer interaction software and services to facilitate remote work, enhance customer service, improve efficiency, and manage customer communications across interactions such as video, voice, email, web, chats, and text. Its technologies include a contact center, video collaboration, outbound dialers, business intelligence, and analytics that are deployed on private cloud, multi-tenant, and on-premise environments.
- Asset Management Group: This business offers a portfolio of software and services to cable operators, network telecom providers, media, transit, defence, and public safety companies. Its products include network infrastructure, operations support systems, video, and cloud TV solutions. It also provides fleet routing, dispatch, scheduling, and communications services for the transportation, government, first responders, and security sectors.
How did Enghouse perform in fiscal Q1 of 2024?
Enghouse aims to grow its sales and earnings via organic growth as well as acquisitions. It aims to acquire companies that provide mission-critical services with annual sales between $5 million and $50 million and a strong base of recurring sales.
Despite a challenging macro environment, Enghouse reported revenue of $120.5 million in the fiscal first quarter (Q1) of 2024 (ended in January), an increase of 13.2% year over year. Its recurring sales that includes SaaS (software-as-a-service) and maintenance services grew 27.2% to $84.6 million, accounting for more than $70 of total sales.
Similar to other software companies, Enghouse aims to transition towards a SaaS-based business model which results in a stable stream of recurring revenue across market cycles.
Enghouse’s operational expenditures declined as a percentage of sales due to operational efficiencies amid inflation and higher costs. A debt-free balance sheet shields Enghouse from elevated interest rates and higher earnings allowed the company to raise dividends by 18.2% to $0.26 per share in March 2024.
Enghouse’s free cash flow stood at $19.5 million in fiscal Q1, and it paid shareholders $12 million in quarterly dividends, indicating a payout ratio of 64%. A sustainable payout ratio has allowed Enghouse to raise dividends by 20% annually in the last 14 years.
Priced at 21.2 times forward earnings, ENGH stock is not too expensive and trades at a discount of 25% to consensus price target estimates.
