Investing in Tech Companies for Dividend Growth? Absolutely!

Published Tue, 10 Nov 2015 15:00 CET by

There are a lot of dividend-paying stocks across all sectors of the U.S financial markets. Yet, a significant portion of the total dividends paid are derived from a relatively small group of blue chip stocks. For example, the Technology sector with Google, Microsoft, Apple and other leading tech companies, pays out about $51 billion in annual dividends, thus edging out all other sectors, mainly Consumer Discretionary with $50 billion and Financials with $48 billion.
This article discusses three small cap tech stocks. Perhaps their most impressive indicator is their D/E ratio of 0.00 as all three companies have no long-term debt. Furthermore, their average dividend yield is 7.04%, when the average dividend yield of the sector is 2.05% and their average payout ratio is 83%, compared to the average payout ratio of the Technology Sector of 62.86%. Although the companies have underperformed the market on a YoY comparison, they are consistent in their dividend payments, confirming that stock performance is not always the best metric to select an investment.

CSG Systems, Evolving Systems and MIND C.T.I. YoY Stock Performance Graph
CSG Systems International (Nasdaq: CSGS) provides market-leading solutions and services to communications companies with a wide range of products, including cable television and direct broadcast satellite, fixed-line and mobile telecommunications, customer interaction management, business intelligence, and content management and monetization.
Financial Highlights Q3 2015: CSG Systems is achieving strong cash flows and operating margins by implementing an effective business model, which moves from a regional to an international delivery scheme, allowing room for recurring annual revenues and improved employee and technology costs. This has led to improved Q3 2015 results, compared to Q3 2014. More specifically:

  • Revenues $186.96 million, up 1.1% YoY from $185.0 due to higher processing and professional services revenues
  • Operating income $40.3 million, up 34.6% YoY from $29.9 million due to cost management efficiency and foreign currency movements
  • Net income $38.8 million, up 40.4% YoY from $27.6 million
  • Operating cash flow $25.8 million, up 31.5% YoY from $19.6 million
Dividend Growth: CSG Systems paid a quarterly cash dividend of $0.175 per share, totaling $17 million YTD to shareholders, out of which approximately $6 million in this quarter. Additionally, it has repurchased $57 million of common stock through its accelerated stock repurchase plan (ASR), which aims a total repurchase of $150 million through 2017. The company’s dividend growth between 2013 and 2015 is 16.7% ($0.15 per share in 2013 to $0.175 per share in 2015).
Future Outlook: CSG Systems strong results are primarily the result of improved cost structure of both its domestic and international operations, as well as the migration of new customers (1.6 million Comcast customers converted YTD), which has further leveraged the company’s existing infrastructure and people cost. Analysts estimate an average EPS of $2.11 by 2016, up by 36.1% from current EPS of $1.55 and an average earnings growth of 12.44% per year for the next two years.

Evolving Systems (Nasdaq: EVOL) engages in the development, deployment, integration and maintenance of software solutions for network operators both in the United States and internationally. Currently, Evolving Systems’ network includes more than 60 network operator customers, many of which are tier-1 wireless carriers.
Weak Q2 2015 Results: the second quarter was quite challenging for Evolving Systems, primarily due to tight budgets, aggressive price plans and flat subscriber net adds. Compared to Q2 2014, Evolving Systems reported revenues of $6.07 million, down from $7.94 million, a 23.6% YoY decline; operating income down to $0.9 million from $2.6 million, a 65.4% YoY decline; net income down by 53.6% YoY, to $0.78 million from $1.68 million. On the upside, the company reported 75% gross margin, 15% operating margin, and 18% adjusted-EBITDA margin. Also, Evolving Systems’ dividend growth since 2010 is 120% and the company has announced a quarterly Q3 2015 dividend of $0.11 per share. Evolving Systems’ Q3 2015 results will be released on November 10.
Future Outlook: in spite of the weak Q2 results and sharp underperformance YoY – down by 45.8%, Evolving Systems’ management focuses on growth opportunities in the emerging markets and plans to continue investing in its product R&D and business development in order to achieve long-term growth and strengthen its market position. Estimated average EPS through 2017 is $0.54 (+30.9% of the current EPS of $0.41) and average annual earnings growth through 2020 is 15%.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
CSG Systems 37.21 23.72 38.85 56.87% -4.22% 1.21 23.92 0 0.93 45%
Evolving Systems 5.35 5.28 10.75 1.33% -50.23% 0.06 13.33 0 0.35 107%
MIND C.T.I. 2.61 2.27 4.26 14.98% -38.73% 0.05 9.65 0 0.32 97%

MIND C.T.I. (Nasdaq: MNDO) engages in the development, manufacturing and marketing of real-time and off-line billing and customer care solutions to vendors, resellers and communications companies in the United States, Africa, Europe, the Asia Pacific and Israel, where it is headquartered. The company specializes in voice, data and content services, including wire-line and wireless, call management systems, voice over IP (VoIP), broadband IPs, LTE operators, cable operators and mobile virtual network operators (MVNOs).
Q3 2015 Results: MIND C.T.I. invests in multiple opportunities both in the U.S. and in Europe. However, certain delays in the closed deals have a negative impact on its financial results. Compared to Q3 2014, MIND C.T.I. reported revenues $5.2 million, down 20% YoY from $6.5 and an operating income of $1.7 million, down 22.7% YoY from $2.2 million. On the upside, net income was $1.5 million, up 36.4% YoY from $1.1 million, whereas the its operating margins exceeded the company’s target of 20%, primarily due to a strong U.S. dollar and an efficient cost structure.
Dividend Growth: for the period 2003-2015, MIND C.T.I.’s dividend growth is 114.3% ($0.3 per share in 2015, compared to $0.14 per share in 2003). The company’s consistency in paying dividends makes it a safe bet for dividend investors, in spite of having underperformed the market by 12.1% YoY.
Future Outlook: MIND C.T.I.’s management is expected to focus on profitability and the generation of strong cash flows to overcome this challenging period and execute its growth strategy effectively. The company continues its pursuit for acquisition targets in Europe and it keeps on targeting new markets with complementary needs based on revenues, corresponding technology and geography.