It looks like American Software, Inc. (NASDAQ:AMSW.A) is about to go ex-dividend in the next four days. If you purchase the stock on or after the 6th of May, you won't be eligible to receive this dividend, when it is paid on the 21st of May.
American Software's next dividend payment will be US$0.11 per share. Last year, in total, the company distributed US$0.44 to shareholders. Looking at the last 12 months of distributions, American Software has a trailing yield of approximately 2.1% on its current stock price of $20.69. If you buy this business for its dividend, you should have an idea of whether American Software's dividend is reliable and sustainable. As a result, readers should always check whether American Software has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for American Software
Dividends are usually paid out of company profits, so if a company pays out more than it earned then its dividend is usually at greater risk of being cut. Last year, American Software paid out 255% of its profit to shareholders in the form of dividends. This is not sustainable behaviour and requires a closer look on behalf of the purchaser. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year it paid out 57% of its free cash flow as dividends, within the usual range for most companies.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and American Software fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
When earnings decline, dividend companies become much harder to analyse and own safely. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. With that in mind, we're discomforted by American Software's 9.7% per annum decline in earnings in the past five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.