Here's What We Like About Sonata Software's (NSE:SONATSOFTW) Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it's exciting to see Sonata Software Limited (NSE:SONATSOFTW) is about to trade ex-dividend in the next 3 days. The ex-dividend date is one business day before a company's record date, which is the date on which the company determines which shareholders are entitled to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Accordingly, Sonata Software investors that purchase the stock on or after the 6th of August will not receive the dividend, which will be paid on the 15th of September.

The company's next dividend payment will be ₹10.00 per share, on the back of last year when the company paid a total of ₹14.00 to shareholders. Based on the last year's worth of payments, Sonata Software stock has a trailing yield of around 1.8% on the current share price of ₹772.4. If you buy this business for its dividend, you should have an idea of whether Sonata Software's dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for Sonata Software

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Sonata Software paid out more than half (60%) of its earnings last year, which is a regular payout ratio for most companies. A useful secondary check can be to evaluate whether Sonata Software generated enough free cash flow to afford its dividend. What's good is that dividends were well covered by free cash flow, with the company paying out 9.2% of its cash flow last year.

It's positive to see that Sonata Software's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Sonata Software earnings per share are up 9.3% per annum over the last five years. Decent historical earnings per share growth suggests Sonata Software has been effectively growing value for shareholders. However, it's now paying out more than half its earnings as dividends. If management lifts the payout ratio further, we'd take this as a tacit signal that the company's growth prospects are slowing.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. Sonata Software has delivered 23% dividend growth per year on average over the past 10 years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

From a dividend perspective, should investors buy or avoid Sonata Software? Earnings per share growth has been modest and Sonata Software paid out over half of its profits and less than half of its free cash flow, although both payout ratios are within normal limits. Overall, it's not a bad combination, but we feel that there are likely more attractive dividend prospects out there.

On that note, you'll want to research what risks Sonata Software is facing. For example, we've found 3 warning signs for Sonata Software that we recommend you consider before investing in the business.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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