Enghouse shines as a dividend growth stock

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 25 countries. The company operates through three divisions, Interactive, Networks, and Transportation to address the different vertical markets. It has two business segments, an Interactive management group that provides customer interaction software (59% of 2020 revenues), and an Asset management group that offers operations support systems, mobile value-added services systems, and data conversion systems (41%). 

By geography, the U.S. accounted for 47% of total revenues in 2020, followed by 13% from the U.K., Europe (15%), Scandinavia (16%), Canada (5%), and others (4%). Enghouse Systems’ revenue comprises hosted and maintenance services (accounting for 60% of revenues), software licenses (23%), professional services (14%), and hardware (3%).

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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. It is also focusing on technology solutions enabling network and digital transformation for 5G operators.

Enghouse deploys a strategy of growing through acquisitions in both its existing and new markets. 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, the Nordics, and the APAC regions. It has a proven history of successful acquisitions and integrations and acquired Sociedade Altitude Software Sistemas e Serviços S.A. in December 2020, focusing on the BPO market segment.

Enghouse’s strategy of organic growth as well as through acquisitions has resulted in its revenue increasing by 17% CAGR in the last decade. The company continues to invest in initiatives to transition new and existing customers to cloud‐based service agreements. 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 pandemic led to increased demand for its remote-work and visual computing solutions. The company is also in a good position to cross-sell its solutions across different market verticals.

Dividends

Enghouse Systems has been paying increasing quarterly dividends over the last decade. The company has an annual average dividend yield of 1% and a reasonably low payout ratio of 34%. This dividend aristocrat last raised its dividend by 18% representing the thirteenth consecutive year in which Enghouse increased its dividend by over 10% and has compounded its dividend payout at an impressive annual rate of 23% over the last ten years.

Enghouse also approved a special dividend of $1.50 per common share in December 2020. It ended the quarter with substantial cash balances, no debt, and significant operating cash flow. The company remains focused on having a strong balance sheet with large cash reserves.

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%+ CAGR in the last three years.

Enghouse has sufficient cash on hand for future acquisitions and has a sound track record of unlocking cost savings from acquisitions. It is targeting to acquire companies in the $5 million – $50 million revenue range with strong recurring revenue. Enghouse Systems is better positioned to deploy its acquisition strategy in the near future, given strong cash on hand balance and an experienced management team. The company is currently focusing on completing selective acquisitions within existing markets and entering new strategic software markets.

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.

Enghouse (ENGH) historical yield
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Competition

Enghouse faces extreme competition from software companies. It competes with the likes of Constellation Software Inc, 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 poses a strong cloud opportunity in the future.

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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 economic factors are currently favorable for acquisitions especially for smallcap companies. Enghouse is in a good position to benefit from improving interactive, networks and transportation sector dynamics in the future.

ENGH vs TSX vs SP500
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Enghouse (ENGH) historical PE
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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.