Don’t Race Out To Buy American Software, Inc. (NASDAQ:AMSW.A) Just Because It’s Going Ex-Dividend

American Software, Inc. (NASDAQ:AMSW.A) stock is about to trade ex-dividend in 3 days. You will need to purchase shares before the 19th of November to receive the dividend, which will be paid on the 4th of December.

American Software’s upcoming dividend is US$0.11 a share, following on from the last 12 months, when the company distributed a total of US$0.44 per share to shareholders. Based on the last year’s worth of payments, American Software stock has a trailing yield of around 2.6% on the current share price of $16.63. If you buy this business for its dividend, you should have an idea of whether American Software’s dividend is reliable and sustainable. We need to see whether the dividend is covered by earnings and if it’s growing.

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. American Software distributed an unsustainably high 185% of its profit as dividends to shareholders last year. Without more sustainable payment behaviour, the dividend looks precarious. A useful secondary check can be to evaluate whether American Software generated enough free cash flow to afford its dividend. Dividends consumed 70% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.

It’s disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and American Software fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we’d view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

historic-dividendNasdaqGS:AMSW.A Historic Dividend November 15th 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. So we’re not too excited that American Software’s earnings are down 3.7% a year over the past five years.

Many investors will assess a company’s dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 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 a high percentage of its income, so without earnings growth, we’re doubtful of whether this dividend will grow much in the future.

Final Takeaway

Should investors buy American Software for the upcoming dividend? Earnings per share have been in decline, which is not encouraging. 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. Bottom line: American Software has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

With that in mind though, if the poor dividend characteristics of American Software don’t faze you, it’s worth being mindful of the risks involved with this business. For example, we’ve found 2 warning signs for American Software that we recommend you consider before investing in the business.

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.

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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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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