Investing in quality dividend growth stocks is a proven strategy to beat broader market gains over time. Enghouse Systems (TSX: ENGH) is one such TSX stock Canadians can consider buying, as it offers a tasty dividend yield of 3.3%, given its annual payout of $1.04 per share.
Enghouse stock has returned less than 70% to shareholders in the last decade. However, if we adjust for dividend reinvestments, cumulative returns are closer to 100%. Let’s see why I’m bullish on this TSX dividend stock right now.
An overview of Enghouse Systems
Enghouse develops enterprise software solutions and has two primary business segments that include the following:
Interactive Management Group: It provides customer interaction software and services to facilitate remote work and manage customer communications across voice, email, web, chats, text, and video. Its technologies include a contact centre, video collaboration, outbound dialers, business intelligence, and analytics deployed in a private cloud, multi-tenant cloud, or on-premise environments. This segment serves insurance companies, telecoms, banks, technology, and healthcare companies.
Asset Management: This segment offers a portfolio of software and services to cable operators, network communication providers, media, transit, defense, and public safety companies. It provides solutions such as network infrastructure, operations support systems, video, and cloud TV solutions, in addition to fleet routing, dispatch, scheduling, transit e-ticketing, and more.
A strong performance in Q2 of 2024
Enghouse Systems increased sales by 17.6% year over year to $130.5 million in the fiscal third quarter (Q3) of 2024 (which ended in June). The company’s recurring revenue, which includes SaaS (software-as-a-service) and maintenance services, grew 22.8% to $88.8 million, accounting for 68% of total sales.
The company’s EBITDA (earnings before interest, tax, depreciation, and amortization) rose by 13% to $37.7 million in Q3, indicating a healthy margin of 28.9%.
Enghouse completed the acquisition of SeaChange in Q3, expanding its IPTV market presence in a growing sector for the company. It has effectively integrated SeaChange into the asset management business, achieving profitability in its first quarter after the acquisition.
During its Q2 earnings call, Enghouse vice president of finance Rob Medved explained, “Offering both SaaS and on-premise solutions positions us uniquely in the marketplace. Operational enhancements across our existing businesses and recent acquisitions are driving positive outcomes, enabling us to maintain robust cash reserves while simultaneously increasing annual dividends, repurchasing shares, and pursuing acquisitions.”
Is the dividend payout sustainable?
Given the company’s outstanding share count, Enghouse’s quarterly dividend expense is close to $14.4 million. Comparatively, its free cash flow in the June quarter totaled $39.7 million, indicating a payout ratio of less than 40%. A low payout ratio suggests Enghouse has enough room to raise dividends, target accretive acquisitions, and strengthen the balance sheet.
Enghouse has increased its dividends by 18% annually in the last decade, enhancing the yield at cost over time.
What is the target price for Enghouse stock?
Analysts tracking Enghouse stock expect its adjusted earnings to expand from $1.31 per share in fiscal 2023 to $1.7 per share in fiscal 2025. So, priced at 18.4 times forward earnings, ENGH stock is cheap and trades at a discount of 15% to consensus price target estimates. If we adjust for dividends, cumulative returns would be closer to 18% in the next 12 months.
