Cognizant Technology Solutions' (NASDAQ:CTSH) Dividend Will Be Increased To US$0.24

The board of Cognizant Technology Solutions Corporation (NASDAQ:CTSH) has announced that it will be increasing its dividend on the 31st of August to US$0.24. The announced payment will take the dividend yield to 1.3%, which is in line with the average for the industry.

See our latest analysis for Cognizant Technology Solutions

Cognizant Technology Solutions' Payment Has Solid Earnings Coverage

Unless the payments are sustainable, the dividend yield doesn't mean too much. However, prior to this announcement, Cognizant Technology Solutions' dividend was comfortably covered by both cash flow and earnings. As a result, a large proportion of what it earned was being reinvested back into the business.

Over the next year, EPS is forecast to expand by 33.3%. If the dividend continues along recent trends, we estimate the payout ratio will be 27%, which is in the range that makes us comfortable with the sustainability of the dividend.

Cognizant Technology Solutions Is Still Building Its Track Record

The dividend hasn't seen any major cuts in the past, but the company has only been paying a dividend for 4 years, which isn't that long in the grand scheme of things. Since 2017, the first annual payment was US$0.60, compared to the most recent full-year payment of US$0.96. This implies that the company grew its distributions at a yearly rate of about 12% over that duration. It is always nice to see strong dividend growth, but with such a short payment history we wouldn't be inclined to rely on it until a longer track record can be developed.

Dividend Growth May Be Hard To Achieve

The company's investors will be pleased to have been receiving dividend income for some time. However, Cognizant Technology Solutions has only grown its earnings per share at 4.8% per annum over the past five years. While EPS growth is quite low, Cognizant Technology Solutions has the option to increase the payout ratio to return more cash to shareholders.

In Summary

In summary, it's great to see that the company can raise the dividend and keep it in a sustainable range. The payout ratio looks good, but unfortunately the company's dividend track record isn't stellar. Taking all of this into consideration, the dividend looks viable moving forward, but investors should be mindful that the company has pushed the boundaries of sustainability in the past and may do so again.

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 1 warning sign for Cognizant Technology Solutions that investors need to be conscious of moving forward. We have also put together a list of global stocks with a solid dividend.

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