American Software, Inc. (NASDAQ:AMSW.A) has announced that it will pay a dividend of $0.11 per share on the 1st of December. This makes the dividend yield 3.7%, which will augment investor returns quite nicely.
American Software Doesn't Earn Enough To Cover Its Payments
If the payments aren't sustainable, a high yield for a few years won't matter that much. Prior to this announcement, the company was paying out 135% of what it was earning. It will be difficult to sustain this level of payout so we wouldn't be confident about this continuing.
Over the next year, EPS is forecast to expand by 7.3%. Assuming the dividend continues along recent trends, we think the payout ratio could reach 131%, which probably can't continue without putting some pressure on the balance sheet.
American Software Has A Solid Track Record
The company has an extended history of paying stable dividends. The dividend has gone from an annual total of $0.40 in 2013 to the most recent total annual payment of $0.44. Its dividends have grown at less than 1% per annum over this time frame. Although we can't deny that the dividend has been remarkably stable in the past, the growth has been pretty muted.
Dividend Growth May Be Hard To Achieve
The company's investors will be pleased to have been receiving dividend income for some time. However, initial appearances might be deceiving. Although it's important to note that American Software's earnings per share has basically not grown from where it was five years ago, which could erode the purchasing power of the dividend over time.
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. Although they have been consistent in the past, we think the payments are a little high to be sustained. We don't think American Software is a great stock to add to your portfolio if income is your focus.
It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. Taking the debate a bit further, we've identified 2 warning signs for American Software that investors need to be conscious of moving forward. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.
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