Is It Worth Considering Enghouse Systems Limited (TSE:ENGH) For Its Upcoming Dividend?

Enghouse Systems Limited (TSE:ENGH) stock is about to trade ex-dividend in four days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company's books on the record date. Accordingly, Enghouse Systems investors that purchase the stock on or after the 16th of August will not receive the dividend, which will be paid on the 30th of August.

The company's next dividend payment will be CA$0.26 per share, on the back of last year when the company paid a total of CA$1.04 to shareholders. Looking at the last 12 months of distributions, Enghouse Systems has a trailing yield of approximately 3.6% on its current stock price of CA$28.96. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

See our latest analysis for Enghouse Systems

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Enghouse Systems paid out 66% of its earnings to investors last year, a normal payout level for most businesses. A useful secondary check can be to evaluate whether Enghouse Systems generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 39% of the free cash flow it generated, which is a comfortable payout ratio.

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.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

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. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're encouraged by the steady growth at Enghouse Systems, with earnings per share up 6.5% on average over the last five years. Decent historical earnings per share growth suggests Enghouse Systems has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Since the start of our data, 10 years ago, Enghouse Systems has lifted its dividend by approximately 21% a year on average. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Has Enghouse Systems got what it takes to maintain its dividend payments? While earnings per share growth has been modest, Enghouse Systems's dividend payouts are around an average level; without a sharp change in earnings we feel that the dividend is likely somewhat sustainable. Pleasingly the company paid out a conservatively low percentage of its free cash flow. In summary, while it has some positive characteristics, we're not inclined to race out and buy Enghouse Systems today.

Wondering what the future holds for Enghouse Systems? See what the three analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

Generally, we wouldn't recommend just buying the first dividend stock you see. Here's a curated list of interesting stocks that are strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.