Enghouse shines as a dividend growth stock

ENGH - Enghouse Systems Limited

Enghouse Systems is a software and services company engaging in developing and selling enterprise oriented applications software.

Enghouse is headquartered in Canada and has offices in over 20 countries. The company operates through three divisions, Interactive, Networks and Transportation to address the different vertical markets. It has two business segments, Interactive management group which provides customer interaction software (55% of 2018 revenues) and Asset management group that offers operations support systems, mobile value-added services systems and data conversion systems (45%).

By geography, the U.S. accounted for 30% of total revenues in 2018, followed by 19% from the U.K., Europe (18%), Scandinavia (24%), Asia-Pacific (6%), and Canada (3%). Enghouse Systems’ revenue comprises of hosted and maintenance services (accounting for 51% of 2018 revenues), licenses (30%), services (17%) and hardware (2%).

Investment Data

Revenue Growth & Market Exposure

Enghouse’s solutions cater to enhance customer service, increase efficiency and improve communications for banks, insurance, utility, technology, hospitality companies, etc. The company develops communications, network and transportation software for telecommunications service providers, electric, oil and gas utilities and transportation industries.

Enghouse deploys a strategy of growing through acquisitions in both its existing and new markets. It successfully completed three acquisitions in the past fiscal year, which expanded its product portfolio in the telecom and transportation sectors in the German and Danish markets, and two more thereafter. The company focuses on acquiring companies with recurring revenues and dealing with customer focused software solutions, complementary to its existing businesses or those that provide an opportunity to enter into new markets. The company prefers to invest in North America, UK, Europe, Nordics, and APAC regions. It has a proven history of successful acquisitions and integrations.

Enghouse’s strategy of organic growth as well as through acquisitions has resulted in its revenue increasing by 9% CAGR in the last five years. The company continues to invest in its operations and in R&D efforts to grow its business. It also aims at deploying next generation networks and smart grid solutions around the world and is investing in developing AI to address competition in the SaaS market.

As a leading company that develops enterprise software solutions for various vertical markets, Enghouse Systems benefits from its diversified product suite and global market presence. The company is also in a good position to cross-sell its solutions across different market verticals.

Dividends

Enghouse Systems has paid regular quarterly dividends over the last twelve years and has increased them consistently over the last decade. The company has an annual average dividend yield of 1.3% and a reasonably low payout ratio of 36%. This Canadian Dividend Aristocrat and Dividend Achiever last raised its dividend payout by a whopping 22% and has compounded its dividend payout at an impressive annual rate of 21% over the last ten years.

The company has maintained steady growth across all its financial metrics such as revenues, EBITDA, cash on hand and dividend per share over the last five years. It has grown its earnings by more than 13% during the last year itself.

Enghouse has sufficient cash on hand for future acquisitions. Reduced acquisition related activity in the prior year not only resulted in an excess cash balance but also reduced redundant restructuring cost, resulting in better margins for Enghouse. The company does not have any major commercial obligation other than the leases of its facilities which are due to expire in FY 2026. Enghouse Systems is thus better positioned to deploy its acquisition strategy in the near future, given better cash on hand balance and an experienced management team.

Enghouse Systems’ strategy of investing in its core capabilities, making focused acquisitions, and maintaining sufficient cash on hand and a strong balance sheet should support its dividend payouts in the future. A low payout ratio also indicated sufficient room for future growth.

Competition

Enghouse faces extreme competition from software companies. It competes with the likes of Constellation Software, Open Text Corp, Ceridian HCM Holding, The Descartes Systems Group, etc. Increasing competition from cloud software providers is also hurting Enghouse Systems’ license sales. Changing industry standards and innovative cloud based solutions are major challenges that the company faces. Enghouse Systems might also experience short term weakness in its license sales and from Microsoft’s changing strategy. However, it poses a strong cloud opportunity in the future.

Bottom Line

Enghouse Systems remains a rock solid cash generating technology company with an established track record of successful acquisitions and value creation. The company’s acquisition growth strategy aims at diversifying its product suite and expanding its geographic reach into new markets. The company is in a good position to benefit from improving interactive, networks and transportation sector dynamics in the future.

ENGH vs Indexes

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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