Enghouse Systems (ENGH.TO) Just Paid $62M in Dividends. Is It Sustainable?

Enghouse Systems just dropped their FY2025 results, and as usual, they're printing cash. But with $62M paid out in dividends this year, the question for income investors is simple: can they keep this up?

Let's break it down.

The Numbers That Matter

Enghouse posted $499M in revenue with $74M in net income. That's a 14.8% net margin - solid for a software company that's been around since 1984.

More importantly for dividend investors:

• $1.34 EPS on 55M shares outstanding
• $62M in dividends paid during the fiscal year
• Payout ratio around 84% based on net income

That payout ratio looks high at first glance. But here's what the headline number misses.

Cash Flow Tells a Different Story

Software companies like Enghouse often have non-cash expenses (amortization of acquired intangibles) that depress reported earnings. When you look at operating cash flow instead of net income, the picture changes.

Enghouse has historically generated strong free cash flow that exceeds their net income. This means their actual ability to pay dividends is better than the earnings-based payout ratio suggests.

The Acquisition Machine

Enghouse's strategy has always been the same: buy niche software companies, integrate them, and extract cash. They've made over 50 acquisitions in their history.

This model works until it doesn't. The risk is that:

• Good acquisition targets become expensive or scarce
• Integration missteps hurt margins
• Debt levels creep up to fund deals

So far, Enghouse has stayed disciplined. They typically pay reasonable multiples and avoid bidding wars.

What Could Go Wrong

The bear case for Enghouse centers on a few risks:

• Growth stagnation - Organic growth has been modest; they rely on acquisitions
• Dividend growth slowing - The payout ratio leaves less room for increases
• Technology disruption - Some of their legacy products could face modern competitors

The Bottom Line

Enghouse is a classic Canadian dividend stock: boring, profitable, and consistent. The dividend looks sustainable based on cash flow, even if the payout ratio on earnings is getting elevated.

For income investors who want exposure to Canadian tech without the volatility of pure growth plays, Enghouse fits the bill. Just don't expect explosive dividend growth from here.

InvestorLens Take: The dividend is safe for now, but watch the payout ratio. If it keeps climbing without earnings growth, that's a yellow flag.