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Should You Buy Cognizant Technology Solutions Corporation (NASDAQ:CTSH) For Its Upcoming Dividend?

Simply Wall St
·4 mins read

Cognizant Technology Solutions Corporation (NASDAQ:CTSH) stock is about to trade ex-dividend in 2 days. You can purchase shares before the 20th of August in order to receive the dividend, which the company will pay on the 31st of August.

Cognizant Technology Solutions's next dividend payment will be US$0.22 per share, on the back of last year when the company paid a total of US$0.88 to shareholders. Last year's total dividend payments show that Cognizant Technology Solutions has a trailing yield of 1.3% on the current share price of $66.93. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Cognizant Technology Solutions

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Cognizant Technology Solutions paid out a comfortable 28% of its profit last year. 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. What's good is that dividends were well covered by free cash flow, with the company paying out 17% of its cash flow last year.

It's encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don't drop precipitously.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
historic-dividend

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Cognizant Technology Solutions earnings per share are up 4.6% per annum over the last five years. Earnings per share growth in recent times has not been a standout. However, companies that see their growth slow can often choose to pay out a greater percentage of earnings to shareholders, which could see the dividend continue to rise.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the past three years, Cognizant Technology Solutions has increased its dividend at approximately 14% a year on average. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

To Sum It Up

Is Cognizant Technology Solutions worth buying for its dividend? Earnings per share growth has been growing somewhat, and Cognizant Technology Solutions is paying out less than half its earnings and cash flow as dividends. This is interesting for a few reasons, as it suggests management may be reinvesting heavily in the business, but it also provides room to increase the dividend in time. We would prefer to see earnings growing faster, but the best dividend stocks over the long term typically combine significant earnings per share growth with a low payout ratio, and Cognizant Technology Solutions is halfway there. It's a promising combination that should mark this company worthy of closer attention.

In light of that, while Cognizant Technology Solutions has an appealing dividend, it's worth knowing the risks involved with this stock. For example, we've found 1 warning sign for Cognizant Technology Solutions that we recommend you consider before investing in the business.

We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.