Magic Software Enterprises Boosts Dividend, Delivers Capital Gains for Positive Total Returns (NASDAQ:MGIC)

Magic Software Enterprises Ltd. (NASDAQ:MGIC) — an Israel-based software development company — hiked its quarterly dividend for the third consecutive year.

With a relatively steady asset appreciation and mostly rising dividend distributions, the company continues rewarding its shareholders with steady total returns. Additionally, Magic Software’s current dividend payout ratio of 50% indicates that the company uses only half of its earnings to cover dividend payouts.

At 50%, Magic Software is at the upper limit of the payout ratio range that investors generally consider sustainable. However, the cutoff is not clearly defined as sustainability of the company‘s dividend payouts depends on multiple factors. At the current payout ratio level, Magic Software should be able to maintain its dividend distributions level for the near future, as well as support the continued annual dividend hikes.

As a small-cap stock, Magic Software Enterprises is certainly not an equity to use as a foundation of one’s investment portfolio. However, the potential gains and the low entry price could entice some investors to take a chance. The share price has been trading mostly above the 50-day moving average since late-June 2019 with only a few dips below the moving average in that period. Additionally, the share price and the 50-day moving average have been trading steadily above the 200-day moving average for nearly 60 days.

While only three Wall Street analysts currently cover the stock, two recommend a “Buy” and one is even more confident with a “Strong Buy” recommendation. Furthermore, the share price has almost 22% room on the upside before it reaches the analysts current $10.50 price target.

As always investors should evaluate the Magic Software stock using their own analysis methodology. However, interested investors should consider taking a long position before the August 26, 2019, ex-dividend date. All investors who can claim stock ownership before this ex-dividend date will ensure eligibility for the next round of dividend distributions on the September 12, 2019, pay date. Making the ex-dividend date cutoff is more important for this stock because the dividends are semi-annual.

Magic Software Enterprises Ltd. (NASDAQ:MGIC)

Headquartered in Or Yehuda, Israel, and founded in 1983, Magic Software Enterprises Ltd. provides proprietary application development, business process integration, vertical software solutions, and IT outsourcing software services in Israel and internationally. The company’s Software Services segment develops, markets, sells and supports application platform, software applications and business and process integration solutions and related services. Its IT Professional Services segment offers IT services in the areas of infrastructure design and delivery, application development, technology planning and implementation services. Additionally, the company’s Magic xpa proprietary application platform offers business applications development and deployment. Furthermore, Magic Software offers a software solution for healthcare providers, business support systems, managing air cargo ground handling and managing TV broadcast channels. In addition to development and implementation, the company provides software maintenance, support, training and consulting services. Formerly known as Mashov Software Export Ltd., the company assumed its current mane — Magic Software Enterprises Ltd. — in 1991.

Magic Software boosted its semi-annual dividend payout amount 4% from $0.15 in the previous period to the upcoming $0.156 distribution. This new quarterly payout amount is equivalent to a $0.312 annualized dividend distribution and corresponds to a 3.62% forward dividend yield, which is 33% higher than the company’s own 2.72% average yield over the past five years.

In addition to exceeding its own five-year yield average, Magic Software’s current dividend yield outperformed the 1.05% average yield of the overall Technology sector by more than 245%. Furthermore, Magic Software’s current yield is also 350% higher than the 0.8% simple average yield of the company’s peers in the Business Software & Services industry segment.

Additionally, Magic Software’s current 3.62% yield also outperformed the 1.39% average yield of the segments only dividend-paying companies by 160%. The wide advantage over industry peers is not unusual. Most technology companies — especially startups — divert all their available funds to research, development and business expansion instead of paying dividends early in the business building process.

Magic Software paid one-off dividends in 2003 and 2010, before beginning a steady stream of semi-annual distributions in 2012. The company boosted its annual dividend payout over the last three consecutive years. The total gain of nearly 80% over a three-year period corresponds to a 21.3% average annual growth rate.

Even with a share price decline driven by the overall market selloff in the fourth-quarter 2018, the share price managed to post a small gain for the year. Additionally, combined with the dividend income distributions, the stock delivered a total gain of nearly 8% over the trailing 12-month period. Because the late-2018 share price pull back had a significantly smaller effect on the longer-term performance, Magic Software delivered a 30% total return over the last three years. Furthermore, the total combined return over the last five years was 45%.

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