American Software, Inc. (NASDAQ:AMSW.A) will pay a dividend of $0.11 on the 2nd of December. The dividend yield will be 2.3% based on this payment which is still above the industry average.
Check out our latest analysis for American Software
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 115% of what it was earning, however the dividend was quite comfortably covered by free cash flows at a cash payout ratio of only 53%. Given that the dividend is a cash outflow, we think that cash is more important than accounting measures of profit when assessing the dividend, so this is a mitigating factor.
Over the next year, EPS is forecast to expand by 2.1%. However, if the dividend continues along recent trends, it could start putting pressure on the balance sheet with the payout ratio reaching 115% over the next year.
American Software Has A Solid Track Record
Even over a long history of paying dividends, the company's distributions have been remarkably stable. The annual payment during the last 10 years was $0.36 in 2012, and the most recent fiscal year payment was $0.44. This implies that the company grew its distributions at a yearly rate of about 2.0% over that duration. Dividends have grown relatively slowly, which is not great, but some investors may value the relative consistency of the dividend.
Dividend Growth May Be Hard To Come By
Investors who have held shares in the company for the past few years will be happy with the dividend income they have received. However, initial appearances might be deceiving. In the last five years, American Software's earnings per share has shrunk at approximately 5.4% per annum. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely - the opposite of dividend growth. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.
Our Thoughts On American Software's Dividend
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.
Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For instance, we've picked out 1 warning sign for American Software that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.