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We Wouldn't Be Too Quick To Buy American Software, Inc. (NASDAQ:AMSW.A) Before It Goes Ex-Dividend

·4 min read

Readers hoping to buy American Software, Inc. (NASDAQ:AMSW.A) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Ex-dividend means that investors that purchase the stock on or after the 6th of February will not receive this dividend, which will be paid on the 21st of February.

American Software's next dividend payment will be US$0.11 per share, and in the last 12 months, the company paid a total of US$0.44 per share. Based on the last year's worth of payments, American Software stock has a trailing yield of around 2.9% on the current share price of $14.93. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. We need to see whether the dividend is covered by earnings and if it's growing.

View our latest analysis for American Software

Dividends are typically paid from company earnings. If a company pays more in dividends than it earned in profit, then the dividend could be unsustainable. American Software distributed an unsustainably high 194% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. A useful secondary check can be to evaluate whether American Software generated enough free cash flow to afford its dividend. It paid out 81% of its free cash flow as dividends, which is within usual limits but will limit the company's ability to lift the dividend if there's no growth.

It's good to see that while American Software's dividends were not covered by profits, at least they are affordable from a cash perspective. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

NasdaqGS:AMSW.A Historical Dividend Yield, February 2nd 2020
NasdaqGS:AMSW.A Historical Dividend Yield, February 2nd 2020

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. American Software's earnings per share have fallen at approximately 9.5% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.

Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last ten 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 194% of its profits, and with shrinking earnings we think it's unlikely that this dividend will grow quickly in the future.

To Sum It Up

Should investors buy American Software for the upcoming dividend? Earnings per share have been shrinking in recent times. Additionally, American Software is paying out quite a high percentage of its earnings, and more than half its cash flow, so it's hard to evaluate whether the company is reinvesting enough in its business to improve its situation. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of American Software.

Ever wonder what the future holds for American Software? See what the two analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.