Software (ETR:SOW) reaffirmed its dividend of €0.76

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The advice of Aktiengesellschaft software (ETR:SOW) announced it would pay a dividend on May 20, with investors receiving €0.76 per share. This brings the dividend yield to 2.5%, which will increase the yield for investors quite well.

Check out our latest analysis for software

Software revenue easily covers distributions

If the payouts aren’t sustainable, a high return for a few years won’t matter much. Prior to this announcement, Software’s dividend was comfortably covered by both cash flow and earnings. This indicates that a large portion of the profits are reinvested in the business, with the aim of fueling growth.

Next year is expected to see EPS increase by 28.6%. If the dividend continues to follow recent trends, we estimate the payout ratio to be 56%, which is within the range that allows us to be comfortable with the sustainability of the dividend.

XTRA:SOW Historic Dividend April 9, 2022

Dividend volatility

Although the company has a long history of dividends, it has been cut at least once in the last 10 years. Since 2012, the dividend has gone from €0.46 to €0.76. This means that it increased its distributions by 5.1% per year during this period. It’s good to see the dividend growing at a decent pace, but the dividend has been cut at least once in the past. The software may have tidied up since then, but we remain cautious.

Dividend growth is questionable

Since the dividend has been reduced in the past, we need to check if earnings are increasing and if this could lead to higher dividends in the future. Software has seen its earnings per share drop 9.2% annually over the past five years. If earnings continue to decline, the company may have to make the difficult choice of cutting the dividend or even stopping it altogether – the opposite of dividend growth. However, next year actually looks positive, with profits expected to increase. We’d just wait for it to become a pattern before we get too excited.

Our Thoughts on the Software Dividend

Overall, it’s good to see a consistent dividend payout, but we believe that over the longer term, the current level of payout may be unsustainable. Payouts haven’t been particularly steady and we don’t see huge upside potential, but with the dividend well covered by cash flow, it could prove reliable in the short term. We don’t think software is a great stock to add to your portfolio if income is your priority.

Companies with a stable dividend policy are likely to enjoy greater investor interest than those that suffer from a more inconsistent approach. Meanwhile, despite the importance of dividend payments, these are not the only factors our readers should be aware of when evaluating a company. For example, we chose 1 software warning sign that investors should consider. Looking for more high yield dividend ideas? Try our collection of strong dividend payers.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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