American Software, Inc. (NASDAQ:AMSW.A) will pay a dividend of US$0.11 on the 26th of August. This means the annual payment is 2.6% of the current stock price, which is above the average for the industry.
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 88% of cash flows, but a higher proportion of net income. The company could be more focused on returning cash to shareholders, but this could indicate that growth opportunities are few and far between.
Looking forward, earnings per share is forecast to fall by 17.7% over the next year. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 148%, which could put the dividend under pressure if earnings don't start to improve.
American Software Has A Solid Track Record
The company has an extended history of paying stable dividends. The dividend has gone from US$0.36 in 2012 to the most recent annual payment of US$0.44. This works out to be a compound annual growth rate (CAGR) of approximately 2.0% a year over that time. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.
Dividend Growth May Be Hard To Achieve
Some investors will be chomping at the bit to buy some of the company's stock based on its dividend history. American Software has seen EPS rising for the last five years, at 6.5% per annum. However, the company isn't reinvesting a lot back into the business, so we would expect the growth rate to slow down somewhat in the future.
The Dividend Could Prove To Be Unreliable
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. In the past the payments have been stable, but we think the company is paying out too much for this to continue for the long term. 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. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Taking the debate a bit further, we've identified 4 warning signs for American Software that investors need to be conscious of moving forward. Is American Software not quite the opportunity you were looking for? Why not check out our selection of top dividend stocks.
What are the risks and opportunities for American Software?
Trading at 26% below our estimate of its fair value
Earnings are forecast to grow 13.38% per year
No risks detected for AMSW.A from our risks checks.
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