It looks like Cognizant Technology Solutions Corporation (NASDAQ:CTSH) is about to go ex-dividend in the next 3 days. This means that investors who purchase shares on or after the 21st of August will not receive the dividend, which will be paid on the 30th of August.
Cognizant Technology Solutions's next dividend payment will be US$0.20 per share. Last year, in total, the company distributed US$0.80 to shareholders. Looking at the last 12 months of distributions, Cognizant Technology Solutions has a trailing yield of approximately 1.3% on its current stock price of $61.22. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. That's why we should always check whether the dividend payments appear sustainable, and if the company is growing.
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. Cognizant Technology Solutions is paying out just 22% of its profit after tax, which is comfortably low and leaves plenty of breathing room in the case of adverse events. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. What's good is that dividends were well covered by free cash flow, with the company paying out 23% 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.
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. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. Fortunately for readers, Cognizant Technology Solutions's earnings per share have been growing at 12% a year for the past five years. Earnings per share are growing rapidly and the company is keeping more than half of its earnings within the business; an attractive combination which could suggest the company is focused on reinvesting to grow earnings further. 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. Cognizant Technology Solutions has delivered an average of 15% per year annual increase in its dividend, based on the past 2 years of dividend payments. Both per-share earnings and dividends have both been growing rapidly in recent times, which is great to see.
Should investors buy Cognizant Technology Solutions for the upcoming dividend? We love that Cognizant Technology Solutions is growing earnings per share while simultaneously paying out a low percentage of both its earnings and cash flow. These characteristics suggest the company is reinvesting in growing its business, while the conservative payout ratio also implies a reduced risk of the dividend being cut in the future. There's a lot to like about Cognizant Technology Solutions, and we would prioritise taking a closer look at it.
Ever wonder what the future holds for Cognizant Technology Solutions? See what the 29 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.