Four Days Left To Buy Magic Software Enterprises Ltd. (NASDAQ:MGIC) Before The Ex-Dividend Date

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Magic Software Enterprises Ltd. (NASDAQ:MGIC) is about to trade ex-dividend in the next four days. If you purchase the stock on or after the 24th of March, you won't be eligible to receive this dividend, when it is paid on the 7th of April.

Magic Software Enterprises's upcoming dividend is US$0.21 a share, following on from the last 12 months, when the company distributed a total of US$0.39 per share to shareholders. Looking at the last 12 months of distributions, Magic Software Enterprises has a trailing yield of approximately 2.3% on its current stock price of $16.74. If you buy this business for its dividend, you should have an idea of whether Magic Software Enterprises's dividend is reliable and sustainable. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.

View our latest analysis for Magic Software Enterprises

Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. It paid out 79% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. A useful secondary check can be to evaluate whether Magic Software Enterprises generated enough free cash flow to afford its dividend. Fortunately, it paid out only 27% of its free cash flow in the past year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see how much of its profit Magic Software Enterprises paid out over the last 12 months.

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it's a relief to see Magic Software Enterprises earnings per share are up 5.9% per annum over the last five years. While earnings have been growing at a credible rate, the company is paying out a majority of its earnings to shareholders. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Magic Software Enterprises has delivered 7.5% dividend growth per year on average over the past nine years. It's encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

Final Takeaway

Has Magic Software Enterprises got what it takes to maintain its dividend payments? While earnings per share growth has been modest, Magic Software Enterprises'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. While it does have some good things going for it, we're a bit ambivalent and it would take more to convince us of Magic Software Enterprises's dividend merits.

While it's tempting to invest in Magic Software Enterprises for the dividends alone, you should always be mindful of the risks involved. Every company has risks, and we've spotted 1 warning sign for Magic Software Enterprises you should know about.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. 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.
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