American Software, Inc. (NASDAQ:AMSW.A) will pay a dividend of US$0.11 on the 18th of February. Based on this payment, the dividend yield on the company's stock will be 1.9%, which is an attractive boost to shareholder returns.
American Software Is Paying Out More Than It Is Earning
A big dividend yield for a few years doesn't mean much if it can't be sustained. Prior to this announcement, the company was paying out 125% of what it was earning and 85% of cash flows. 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.
EPS is set to fall by 17.3% over the next 12 months. Assuming the dividend continues along recent trends, we believe the payout ratio could reach 155%, which could put the dividend under pressure if earnings don't start to improve.
American Software Has A Solid Track Record
The company has a sustained record of paying dividends with very little fluctuation. Since 2011, the first annual payment was US$0.36, compared to the most recent full-year payment of US$0.44. This implies that the company grew its distributions at a yearly rate of about 2.0% over that duration. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.
There Isn't Much Room To Grow The Dividend
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. We are encouraged to see that American Software has grown earnings per share at 5.8% per year over the past five years. However, the payout ratio is very high, not leaving much room for growth of the dividend in the future.
The Dividend Could Prove To Be Unreliable
In summary, while it's good to see that the dividend hasn't been cut, we are a bit cautious about American Software's payments, as there could be some issues with sustaining them into the future. 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. We don't think American Software is a great stock to add to your portfolio if income is your focus.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. Still, investors need to consider a host of other factors, apart from dividend payments, when analysing a company. For instance, we've picked out 4 warning signs for American Software that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our curated list of strong dividend payers.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.