Progress Software Corporation (NASDAQ:PRGS): Dividend-Growth Play For Small-Cap Investment

Another Win For Tech In The Post-Pandemic Market

Progress Software Corporation (NASDAQ:PRGS) is by no means a blue-chip quality stock. What it is, though, is a high-quality, dividend-paying, small-cap growth story focused on tech. By focusing on tech I mean this company is in business providing software solutions for business, industry, and developers including the Cloud. A look at the company’s plans reveals some lofty goals, namely to double in size within the next five years. Based on the second-quarter results the company is well on its way. Until then, investors can sit back and collect a healthy dividend.

The results for the second quarter are a little mixed but only in terms of analysts and expectations. On the top-line, revenue was flat to last year but came in above the company’s guidance and a hair short of consensus. On the bottom line, both GAAP and ADJ EPS missed but by pennies. The salient fact is, however, the EPS grew more than 105% from the previous year and on track to exceed consensus this year.

The outlook for 2020 is good and got better with the second-quarter results. Management issued an update to guidance that puts both revenue and EPS above consensus. This means both this year’s and next year’s consensus is wrong, next year’s far wrong, which points to a round of upgrades and new coverage for this stock.

Some highlights from the report:

• The entire workforce stayed home for the three months covered by this report. That said, the company experienced no hiccups in its operations and remained on track to meet and exceed annual goals. What this means for the business goes far-beyond disruption, however, as the pandemic has given the company visible proof its systems and solutions work.
• The company’s recurring revenue stream was virtually unchanged during the crisis. With subscription/services recurring revenue totaling 81% of quarterly revenue and growing this is great news indeed. Looking forward, the company can expect to see recurring revenue continue to underpin its financial health and growth strategy.
• There was no disruption to the product/acquisition pipeline. In fact, during the quarter, the M&A pipeline grew as the company targeted other software services exhibiting utility for its clients.

A Dividend Aristocrat In The Making?

Progress Software is a dividend payer and an attractive one, considering its small-cap status and aggressive growth strategy. After reading the report, my take is that this company’s management is committed to returning value to shareholders in the form of dividends and buybacks. In fact, the company’s own investor materials more than implies that dividends rank higher in importance than growth, and growth is the company’s true focus.

At today’s prices, the yield is sub-2.0% but not by much. The 1.75% is roughly in-line with the S&P 500 average with the addition of aggressive growth. The payout ratio is also very low, about 24%, providing plenty of room on the cash flow statement and balance sheet for future increases. Regarding increases, the company has been raising the distribution for four years, every year it has paid one, and appears to be on track to deliver another one with the next declaration later this summer.

The Technical Outlook: A But Signal In Process

A look at this chart shows me a buying opportunity in progress. The stock is moving up off of a higher-low after consolidating a new high. The near-term trend is up and confirmed by the moving average, a break above the moving average, and a bullish crossover in the stochastic. The MACD is my only worry at this time but not a big one, while still bearish it has already peaked and come close to forming its own bullish crossover. The next target for resistance is near $40, a move above there would bring the $42 level into the sights.

The $42.50 may provide stronger resistance because it is the bottom of an as-yet unclosed price gap. If, when, the $42.50 level is surpassed I see this stock moving up to the $50 region on earnings and the dividend.