The board of American Software, Inc. (NASDAQ:AMSW.A) has announced that it will pay a dividend on the 2nd of December, with investors receiving $0.11 per share. Based on this payment, the dividend yield on the company's stock will be 2.3%, which is an attractive boost to shareholder returns.
American Software Is Paying Out More Than It Is Earning
Impressive dividend yields are good, but this doesn't matter much if the payments can't be sustained. Before making this announcement, American Software's dividend was higher than its profits, but the free cash flows quite comfortably covered it. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don't think there is much reason to worry.
The next 12 months is set to see EPS grow by 2.1%. If the dividend continues on its recent course, the payout ratio in 12 months could be 115%, which is a bit high and could start applying pressure to the balance sheet.
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. The dividend has gone from an annual total of $0.36 in 2012 to the most recent total annual payment of $0.44. This works out to be a compound annual growth rate (CAGR) of approximately 2.0% a year over that time. While the consistency in the dividend payments is impressive, we think the relatively slow rate of growth is less attractive.
Dividend Growth May Be Hard To Come By
The company's investors will be pleased to have been receiving dividend income for some time. However, things aren't all that rosy. In the last five years, American Software's earnings per share has shrunk at approximately 5.4% per annum. Declining earnings will inevitably lead to the company paying a lower dividend in line with lower profits. Earnings are forecast to grow over the next 12 months and if that happens we could still be a little bit cautious until it becomes a pattern.
Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would probably look elsewhere for an income investment.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we've identified 1 warning sign 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 yield dividend stocks.
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