Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that Compucom Software Limited (NSE:COMPUSOFT) is about to go ex-dividend in just 3 days. Ex-dividend means that investors that purchase the stock on or after the 28th of August will not receive this dividend, which will be paid on the 5th of October.
Compucom Software's next dividend payment will be ₹0.10 per share, on the back of last year when the company paid a total of ₹0.10 to shareholders. Looking at the last 12 months of distributions, Compucom Software has a trailing yield of approximately 1.2% on its current stock price of ₹8.5. 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.
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. Compucom Software lost money last year, so the fact that it's paying a dividend is certainly disconcerting. There might be a good reason for this, but we'd want to look into it further before getting comfortable. With the recent loss, it's important to check if the business generated enough cash to pay its dividend. If Compucom Software didn't generate enough cash to pay the dividend, then it must have either paid from cash in the bank or by borrowing money, neither of which is sustainable in the long term. What's good is that dividends were well covered by free cash flow, with the company paying out 15% of its cash flow last year.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Compucom Software reported a loss last year, and the general trend suggests its earnings have also been declining in recent years, making us wonder if the dividend is at risk.
Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Compucom Software's dividend payments per share have declined at 2.8% per year on average over the past 10 years, which is uninspiring. While it's not great that earnings and dividends per share have fallen in recent years, we're encouraged by the fact that management has trimmed the dividend rather than risk over-committing the company in a risky attempt to maintain yields to shareholders.
Remember, you can always get a snapshot of Compucom Software's financial health, by checking our visualisation of its financial health, here.
The Bottom Line
Has Compucom Software got what it takes to maintain its dividend payments? It's hard to get used to Compucom Software paying a dividend despite reporting a loss over the past year. At least the dividend was covered by free cash flow, however. It's not an attractive combination from a dividend perspective, and we're inclined to pass on this one for the time being.
Keen to explore more data on Compucom Software's financial performance? Check out our visualisation of its historical revenue and earnings growth.
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