It looks like Magic Software Enterprises Ltd. (NASDAQ:MGIC) is about to go ex-dividend in the next 3 days. You can purchase shares before the 26th of August in order to receive the dividend, which the company will pay on the 12th of September.
Magic Software Enterprises's next dividend payment will be US$0.16 per share, and in the last 12 months, the company paid a total of US$0.30 per share. Calculating the last year's worth of payments shows that Magic Software Enterprises has a trailing yield of 3.4% on the current share price of $8.88. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to check whether the dividend payments are covered, and if earnings are growing.
Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. Its dividend payout ratio is 83% of profit, which means the company is paying out a majority of its earnings. The relatively limited profit reinvestment could slow the rate of future earnings growth We'd be worried about the risk of a drop in earnings. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 51% of its free cash flow as dividends, within the usual range for most companies.
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.
Have Earnings And Dividends Been Growing?
Companies with falling earnings are riskier for dividend shareholders. If earnings fall far enough, the company could be forced to cut its dividend. That's why it's not ideal to see Magic Software Enterprises's earnings per share have been shrinking at 3.0% a year over the previous five years.
We'd also point out that Magic Software Enterprises issued a meaningful number of new shares in the past year. It's hard to grow dividends per share when a company keeps creating new shares.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Magic Software Enterprises's dividend payments per share have declined at 4.8% per year on average over the past 10 years, which is uninspiring. It's never nice to see earnings and dividends falling, but at least management has cut the dividend rather than potentially risk the company's health in an attempt to maintain it.
The Bottom Line
Should investors buy Magic Software Enterprises for the upcoming dividend? While earnings per share are shrinking, it's encouraging to see that at least Magic Software Enterprises's dividend appears sustainable, with earnings and cashflow payout ratios that are within reasonable bounds. It's not the most attractive proposition from a dividend perspective, and we'd probably give this one a miss for now.
Curious what other investors think of Magic Software Enterprises? See what analysts are forecasting, with this visualisation of its historical and future estimated earnings and cash flow .
If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.