Readers hoping to buy Cognizant Technology Solutions Corporation (NASDAQ:CTSH) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. Typically, the ex-dividend date is one business day before the record date which is the date on which a company determines the shareholders eligible to receive a dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn’t show on the record date. This means that investors who purchase Cognizant Technology Solutions’ shares on or after the 18th of August will not receive the dividend, which will be paid on the 30th of August.
The company’s next dividend payment will be US$0.27 per share. Last year, in total, the company distributed US$1.08 to shareholders. Based on the last year’s worth of payments, Cognizant Technology Solutions has a trailing yield of 1.5% on the current stock price of $69.78. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. As a result, readers should always check whether Cognizant Technology Solutions has been able to grow its dividends, or if the dividend might be cut.
See our latest analysis for Cognizant Technology Solutions
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. Cognizant Technology Solutions is paying out just 24% 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. It paid out 23% of its free cash flow as dividends last year, which is conservatively low.
It’s positive to see that Cognizant Technology Solutions’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.
Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.
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 fall far enough, the company could be forced to cut its dividend. For this reason, we’re glad to see Cognizant Technology Solutions’ earnings per share have risen 11% per annum over the last five years. The company has managed to grow earnings at a rapid rate, while reinvesting most of the profits within the business. This will make it easier to fund future growth efforts and we think this is an attractive combination – plus the dividend can always be increased later.
Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, five years ago, Cognizant Technology Solutions has lifted its dividend by approximately 12% a year on average. It’s great to see earnings per share growing rapidly over several years, and dividends per share growing right along with it.
The Bottom Line
Is Cognizant Technology Solutions an attractive dividend stock, or better left on the shelf? Cognizant Technology Solutions has been growing earnings at a rapid rate, and has a conservatively low payout ratio, implying that it is reinvesting heavily in its business; the sterling combination. Cognizant Technology Solutions looks solid on this analysis overall, and we’d definitely consider investigating it more closely.
In light of that, while Cognizant Technology Solutions has an appealing dividend, it’s worth knowing the risks involved with this stock. Every company has risks, and we’ve spotted 1 warning sign for Cognizant Technology Solutions you should know about.
If you’re in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.
Have feedback on this article? Concerned about the content? get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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