File this one in the ‘if it ain’t broke’ category. For years, Enghouse Systems (Enghouse Systems Stock Quote, Chart, News TSX:ENGH) has displayed its well-honed skills at acquiring and integrating software businesses into the fold, while shareholders keep seeing the results in ENGH’s top and bottom lines.
But it’s the company’s focus on feeding its dividend —a rarity in the tech space— which should be catching your eye, says David Driscoll of Liberty International, who thinks Enghouse is a great buy-it-and-forget-it option.
“Enghouse is in our tax-free savings accounts for clients and there’s no reason to get rid of it because they’s a software firm in the telecommunications utility industry that just improves and takes care of what’s going on within the company,” said Driscoll, CEO of Liberty International, who spoke to BNN Bloomberg last Friday.
“Free cash flow continues to grow and the one-year dividend growth is 20 per cent, for five-year it’s 17 per cent. So this is where you just want to sit back and let those thousands of employees at Enghouse work for you and every three months you hold out your hand and they give you profits in the form of a dividend,” he added.
Markham, Ontario-based Enghouse was one of the TSX’s top tech performers in 2019, finishing the year up 45 per cent, and the stock is continuing its success in 2020, already up 12 per cent for the year.
ENGH’s share price got a big boost in December when the company released its fiscal fourth quarter earnings, showing revenue growth of 27 per cent for the Q4 and 13 per cent growth for the fiscal 2019. Earnings for the quarter and full year were also encouraging, as the company managed to increase profits even as it integrated businesses at a rapid pace. Enghouse’s adjusted EBITDA for the Q4 was up 22 per cent year-over-year and up nine per cent for 2019.
The growth-by-acquisition story was busy last year, purchasing Espial Group, Vidyo, ProOpti and Eptica, totalling $101 million in acquisitions, while in January Enghouse bought media processing software company Dialogic for $52.0 million.
Driscoll said that while ENGH’s dividend is small at a yield of 0.8 per cent, its growth rate makes all the difference.
“If you’re growing [the dividend] at 20 per cent a year, it’s going to become a big dividend income generator for you as time goes by,” Driscoll said. “If you use the rule of 72 with a 20 per cent growth rate, that income is going to double every three years.”
“Think of a company whose dividends grow at five per cent —we’ll call them BCE but we’ll mention no names— where that’s below average growth rate, so income doubles every 14 years. Which one would I rather have? I’d rather have Enghouse because I’m getting greater dividend growth and as the dividends grow over time, ultimately, the share prices have to follow so you get that blend of income and growth,” Driscoll says.