Magic Software Enterprises (NASDAQ:MGIC) Is Increasing Its Dividend To US$0.22

Magic Software Enterprises Ltd. (NASDAQ:MGIC) will increase its dividend on the 7th of April to US$0.22. This makes the dividend yield 2.5%, which is above the industry average.

View our latest analysis for Magic Software Enterprises

Magic Software Enterprises' Payment Has Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before this announcement, Magic Software Enterprises was paying out 74% of earnings, but a comparatively small 64% of free cash flows. In general, cash flows are more important than earnings, so we are comfortable that the dividend will be sustainable going forward, especially with so much cash left over for reinvestment.

Over the next year, EPS is forecast to expand by 42.2%. If the dividend continues along recent trends, we estimate the payout ratio will be 60%, which is in the range that makes us comfortable with the sustainability of the dividend.

Magic Software Enterprises' Dividend Has Lacked Consistency

Looking back, Magic Software Enterprises' dividend hasn't been particularly consistent. This suggests that the dividend might not be the most reliable. Since 2013, the first annual payment was US$0.20, compared to the most recent full-year payment of US$0.47. This works out to be a compound annual growth rate (CAGR) of approximately 9.9% a year over that time. A reasonable rate of dividend growth is good to see, but we're wary that the dividend history is not as solid as we'd like, having been cut at least once.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. We are encouraged to see that Magic Software Enterprises has grown earnings per share at 17% per year over the past five years. EPS has been growing at a reasonable rate, although with most of the profits being paid out to shareholders, growth prospects could be more limited in the future.

Magic Software Enterprises Looks Like A Great Dividend Stock

Overall, a dividend increase is always good, and we think that Magic Software Enterprises is a strong income stock thanks to its track record and growing earnings. Distributions are quite easily covered by earnings, which are also being converted to cash flows. Taking this all into consideration, this looks like it could be a good dividend opportunity.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. As an example, we've identified 1 warning sign for Magic Software Enterprises that you should be aware of before investing. Is Magic Software Enterprises not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.

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