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Amdocs Limited (NASDAQ:DOX) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. In other words, investors can purchase Amdocs' shares before the 29th of June in order to be eligible for the dividend, which will be paid on the 23rd of July.
The company's next dividend payment will be US$0.36 per share, on the back of last year when the company paid a total of US$1.44 to shareholders. Looking at the last 12 months of distributions, Amdocs has a trailing yield of approximately 1.9% on its current stock price of $77.82. If you buy this business for its dividend, you should have an idea of whether Amdocs's dividend is reliable and sustainable. As a result, readers should always check whether Amdocs has been able to grow its dividends, or if the dividend might be cut.
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. Fortunately Amdocs's payout ratio is modest, at just 26% of profit. 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. The good news is it paid out just 24% of its free cash flow in the last year.
It's positive to see that Amdocs's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.
Have Earnings And Dividends Been Growing?
Stocks in companies that generate sustainable earnings growth often make the best dividend prospects, as it is easier to lift the dividend when earnings are rising. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Fortunately for readers, Amdocs's earnings per share have been growing at 12% a year for the past five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. Fast-growing businesses that are reinvesting heavily are enticing from a dividend perspective, especially since they can often increase the payout ratio later.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Amdocs has delivered an average of 12% per year annual increase in its dividend, based on the past nine years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
From a dividend perspective, should investors buy or avoid Amdocs? Amdocs has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; a sterling combination. Amdocs looks solid on this analysis overall, and we'd definitely consider investigating it more closely.
While it's tempting to invest in Amdocs for the dividends alone, you should always be mindful of the risks involved. For example, we've found 3 warning signs for Amdocs (1 makes us a bit uncomfortable!) that deserve your attention before investing in the shares.
If you're in the market for dividend stocks, we recommend checking our list of top 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.
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