Some investors rely on dividends to grow their wealth, and if you’re one of those dividend detectives you might be interested Cognizant Technology Solutions Corporation (NASDAQ: CTSH) will go ex-dividend in just three days. As a rule, the ex-dividend day is one business day before the record date on which a company determines the shareholders who are entitled to dividends. The ex-dividend date is important as the settlement process spans two full business days. So if you missed that deadline, you wouldn’t be on the company’s books on the deadline. In other words, investors can purchase Cognizant Technology Solutions shares before August 19th to be eligible for the dividend, which will be paid on August 31st.
The company’s next dividend payment will be $ 0.24 per share, after the company paid out a total of $ 0.96 to shareholders last year. Last year’s total dividend payments show that Cognizant Technology Solutions has a trailing return of 1.2% on its current share price of $ 77.63. Dividends are an important source of income for many shareholders, but the health of the company is critical to sustaining those dividends. We have to see if the dividend is covered by profits and if it is growing.
Dividends are usually paid out of company profits. So when a company pays out more than it earned, there is usually a higher risk of its dividend being cut. Cognizant Technology Solutions paid out a comfortable 29% of its profits last year. However, even highly profitable companies sometimes don’t generate enough cash to pay the dividend, which is why we should always check whether the dividend is covered by cash flow. Good thing is that dividends have been well met by free cash flow, with the company paying out 23% of its cash flow over the past year.
It’s encouraging to see that the dividend is covered by both earnings and cash flow. This generally suggests that the dividend will be sustainable as long as earnings don’t drop abruptly.
Have profits and dividends grown?
Stocks of companies with sustained earnings growth often offer the best dividend prospects because as earnings increase, it is easier to increase the dividend. Investors love dividends. So if earnings are going down and dividends are going down, expect a stock to sell heavily at the same time. With this in mind, we are encouraged by the steady growth of Cognizant Technology Solutions, with average earnings per share of 3.4% over the past five years. Earnings per share growth hasn’t been particularly noteworthy lately. There are several ways to increase the dividend, however, and one of them is simply that the company may distribute a larger portion of its profits as dividends.
Most investors judge a company’s dividend prospects primarily by its historical dividend growth rate. Cognizant Technology Solutions has averaged 12% dividend growth per year for the past four years. We’re excited to see dividends rising along with earnings over the years, which could be a sign that the company intends to share the growth with shareholders.
Should investors buy Cognizant Technology Solutions for the upcoming dividend? Earnings per share are up moderately, and Cognizant Technology Solutions is paying less than half of its earnings and cash flow in dividends, which is an attractive combination as it suggests the company is investing in growth. It might be nice to see earnings grow faster, but Cognizant Technology Solutions is conservative with its dividend payouts and could still perform well in the long run. There’s a lot to like about Cognizant Technology Solutions, and we’d prefer to take a closer look at it.
With that in mind, you should investigate what risks Cognizant Technology Solutions is exposed to. As for the investment risks, We identified 1 warning sign with Cognizant technology solutions and understanding them should be part of your investment process.
If you’re in the dividend stocks market, we recommend Check out our list of the top dividend stocks with a yield greater than 2% and an upcoming dividend.
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This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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