It looks like American Software, Inc. (NASDAQ:AMSW.A) is about to go ex-dividend in the next 3 days. Investors can purchase shares before the 19th of November in order to be eligible for this dividend, which will be paid on the 4th of December.
American Software's upcoming dividend is US$0.11 a share, following on from the last 12 months, when the company distributed a total of US$0.44 per share to shareholders. Based on the last year's worth of payments, American Software has a trailing yield of 2.6% on the current stock price of $16.63. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. 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 typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. American Software distributed an unsustainably high 185% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether American Software generated enough free cash flow to afford its dividend. It paid out more than half (70%) of its free cash flow in the past year, which is within an average 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. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. 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?
Companies with falling earnings are riskier for dividend shareholders. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. That's why it's not ideal to see American Software's earnings per share have been shrinking at 3.7% a year over the previous five years.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. In the last 10 years, American Software has lifted its dividend by approximately 2.0% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. American Software is already paying out 185% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.