The board of American Software, Inc. (NASDAQ:AMSW.A) has announced that it will pay a dividend of US$0.11 per share on the 27th of August. The dividend yield will be 2.0% based on this payment which is still above the industry average.
American Software Doesn't Earn Enough To Cover Its Payments
A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, the dividend made up 89% of cash flows, but a higher proportion of net income. While the cash payout ratio isn't necessarily a cause for concern, the company is probably focusing more on returning cash to shareholders than growing the business.
Looking forward, earnings per share is forecast to fall by 28.9% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could reach over 200%, which could put the dividend under pressure if earnings don't start to improve.
American Software Has A Solid Track Record
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. Since 2011, the first annual payment was US$0.36, compared to the most recent full-year payment of US$0.44. This means that it has been growing its distributions at 2.0% per annum over that time. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Dividend Growth Is Doubtful
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. Let's not jump to conclusions as things might not be as good as they appear on the surface. It's not great to see that American Software's earnings per share has fallen at approximately 7.0% per year over the past five years. If the company is making less over time, it naturally follows that it will also have to pay out less in dividends.
American Software's Dividend Doesn't Look Sustainable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. We can't deny that the payments have been very stable, but we are a little bit worried about the very high payout ratio. This company is not in the top tier of income providing stocks.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 4 warning signs for American Software that you should be aware of before investing. If you are a dividend investor, you might also want to look at our curated list of high performing dividend stock.
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