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Today we’ll take a closer look at Computer Age Management Services Limited (NSE:CAMS) from a dividend investor’s perspective. Owning a strong business and reinvesting the dividends is widely seen as an attractive way of growing your wealth. If you are hoping to live on your dividends, it’s important to be more stringent with your investments than the average punter. Regular readers know we like to apply the same approach to each dividend stock, and we hope you’ll find our analysis useful.
Before you buy any stock for its dividend however, you should always remember Warren Buffett’s two rules: 1) Don’t lose money, and 2) Remember rule #1. We’ll run through some checks below to help with this.
Click the interactive chart for our full dividend analysis
Payout ratios
Dividends are usually paid out of company earnings. If a company is paying more than it earns, then the dividend might become unsustainable – hardly an ideal situation. So we need to form a view on if a company’s dividend is sustainable, relative to its net profit after tax. Computer Age Management Services paid out 41% of its profit as dividends, over the trailing twelve month period. This is a medium payout level that leaves enough capital in the business to fund opportunities that might arise, while also rewarding shareholders. Besides, if reinvestment opportunities dry up, the company has room to increase the dividend.
In addition to comparing dividends against profits, we should inspect whether the company generated enough cash to pay its dividend. Computer Age Management Services paid out a conservative 28% of its free cash flow as dividends last year. It’s positive to see that Computer Age Management Services’ 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.
With a strong net cash balance, Computer Age Management Services investors may not have much to worry about in the near term from a dividend perspective.
Remember, you can always get a snapshot of Computer Age Management Services’ latest financial position, by checking our visualisation of its financial health.
Dividend Volatility
One of the major risks of relying on dividend income, is the potential for a company to struggle financially and cut its dividend. Not only is your income cut, but the value of your investment declines as well – nasty. With a payment history of less than 2 years, we think it’s a bit too soon to think about living on the income from its dividend.
Modest dividend growth is good to see, especially with the payments being relatively stable. However, the payment history is relatively short and we wouldn’t want to rely on this dividend too much.
Dividend Growth Potential
Examining whether the dividend is affordable and stable is important. However, it’s also important to assess if earnings per share (EPS) are growing. Growing EPS can help maintain or increase the purchasing power of the dividend over the long run. Computer Age Management Services has grown its earnings per share at 9.0% per annum over the past five years. It’s good to see decent earnings growth and a low payout ratio. Companies with these characteristics often display the fastest dividend growth over the long term – assuming earnings can be maintained, of course.
Conclusion
Dividend investors should always want to know if a) a company’s dividends are affordable, b) if there is a track record of consistent payments, and c) if the dividend is capable of growing. Firstly, we like that Computer Age Management Services has low and conservative payout ratios. We were also glad to see it growing earnings, although its dividend history is not as long as we’d like. Overall we think Computer Age Management Services scores well on our analysis. It’s not quite perfect, but we’d definitely be keen to take a closer look.
It’s important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. As an example, we’ve identified 1 warning sign for Computer Age Management Services that you should be aware of before investing.
We have also put together a list of global stocks with a market capitalisation above $1bn and yielding more 3%.
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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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
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