Magic Software Enterprises Ltd. (NASDAQ:MGIC) stock is about to trade ex-dividend in 3 days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company’s books as a shareholder in order to receive the dividend. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company’s books on the record date. Accordingly, Magic Software Enterprises investors that purchase the stock on or after the 27th of August will not receive the dividend, which will be paid on the 14th of September.
The company’s next dividend payment will be US$0.23 per share. Last year, in total, the company distributed US$0.47 to shareholders. Looking at the last 12 months of distributions, Magic Software Enterprises has a trailing yield of approximately 2.4% on its current stock price of $19.26. If you buy this business for its dividend, you should have an idea of whether Magic Software Enterprises’s dividend is reliable and sustainable. So we need to investigate whether Magic Software Enterprises can afford its dividend, and if the dividend could grow.
If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Its dividend payout ratio is 79% 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. Thankfully its dividend payments took up just 40% of the free cash flow it generated, which is a comfortable payout ratio.
It’s positive to see that Magic Software Enterprises’s dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we’re encouraged by the steady growth at Magic Software Enterprises, with earnings per share up 9.0% on average over the last five years. Decent historical earnings per share growth suggests Magic Software Enterprises has been effectively growing value for shareholders. However, it’s now paying out more than half its earnings as dividends. Therefore it’s unlikely that the company will be able to reinvest heavily in its business, which could presage slower growth in the future.
The main way most investors will assess a company’s dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, nine years ago, Magic Software Enterprises has lifted its dividend by approximately 9.9% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.
To Sum It Up
From a dividend perspective, should investors buy or avoid Magic Software Enterprises? Earnings per share growth has been modest and Magic Software Enterprises paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. In summary, while it has some positive characteristics, we’re not inclined to race out and buy Magic Software Enterprises today.
In light of that, while Magic Software Enterprises has an appealing dividend, it’s worth knowing the risks involved with this stock. 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.
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.
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