Magic Software Enterprises' (NASDAQ:MGIC) Upcoming Dividend Will Be Larger Than Last Year's
The board of Magic Software Enterprises Ltd. (NASDAQ:MGIC) has announced that it will be increasing its dividend on the 7th of April to US$0.22. This will take the annual payment from 2.5% to 2.5% of the stock price, which is above what most companies in the industry pay.
View our latest analysis for Magic Software Enterprises
Magic Software Enterprises' Earnings Easily Cover the Distributions
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, Magic Software Enterprises' dividend made up quite a large proportion of earnings but only 62% of free cash flows. Since the dividend is just paying out cash to shareholders, we care more about the cash payout ratio from which we can see plenty is being left over for reinvestment in the business.
Over the next year, EPS is forecast to expand by 64.8%. If the dividend continues along recent trends, we estimate the payout ratio will be 61%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Magic Software Enterprises' Dividend Has Lacked Consistency
Even in its relatively short history, the company has reduced the dividend at least once. If the company cuts once, it definitely isn't argument against the possibility of it cutting in the future. Since 2013, the dividend has gone from US$0.20 to US$0.45. This works out to be a compound annual growth rate (CAGR) of approximately 9.4% 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.
Magic Software Enterprises' Dividend Might Lack Growth
Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. We are encouraged to see that Magic Software Enterprises has grown earnings per share at 14% per year over the past five years. Recently, the company has been able to grow earnings at a decent rate, but with the payout ratio on the higher end we don't think the dividend has many prospects for growth.
In Summary
In summary, while it's always good to see the dividend being raised, we don't think Magic Software Enterprises' payments are rock solid. In the past, the payments have been unstable, but over the short term the dividend could be reliable, with the company generating enough cash to cover it. This company is not in the top tier of income providing stocks.
Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 1 warning sign for Magic Software Enterprises that investors need to be conscious of moving forward. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.
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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.
