Here’s Why We’re Wary Of Buying Quantum Software’s (WSE:QNT) For Its Upcoming Dividend

Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see Quantum Software S.A. (WSE:QNT) is about to trade ex-dividend in the next day or so. The ex-dividend date occurs one day before the record date which is the day on which shareholders need to be on the company’s books in order to receive a dividend. The ex-dividend date is of consequence because whenever a stock is bought or sold, the trade takes at least two business day to settle. Meaning, you will need to purchase Quantum Software’s shares before the 30th of June to receive the dividend, which will be paid on the 15th of July.

The company’s next dividend payment will be zł3.00 per share, on the back of last year when the company paid a total of zł3.17 to shareholders. Calculating the last year’s worth of payments shows that Quantum Software has a trailing yield of 9.8% on the current share price of PLN32.2. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. So we need to investigate whether Quantum Software can afford its dividend, and if the dividend could grow.

See our latest analysis for Quantum Software

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. Quantum 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 Quantum 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. Quantum Software paid out more free cash flow than it generated – 194%, to be precise – last year, which we think is concerningly high. It’s hard to consistently pay out more cash than you generate without either borrowing or using company cash, so we’d wonder how the company justifies this payout level.

Quantum Software does have a large net cash position on the balance sheet, which could fund large dividends for a time, if the company so chose. Still, smart investors know that it is better to assess dividends relative to the cash and profit generated by the business. Paying dividends out of cash on the balance sheet is not long-term sustainable.

Click here to see how much of its profit Quantum Software paid out over the last 12 months.

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 decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. Quantum Software reported a loss last year, but at least the general trend suggests its income has been improving over the past five years. Even so, an unprofitable company whose business does not quickly recover is usually not a good candidate for dividend investors.

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, 10 years ago, Quantum Software has lifted its dividend by approximately 25% a year on average. It’s exciting to see that both earnings and dividends per share have grown rapidly over the past few years.

Get our latest analysis on Quantum Software’s balance sheet health here.

To Sum It Up

Has Quantum Software got what it takes to maintain its dividend payments? It’s hard to get used to Quantum Software paying a dividend despite reporting a loss over the past year. Worse, the dividend was not well covered by cash flow. With the way things are shaping up from a dividend perspective, we’d be inclined to steer clear of Quantum Software.

So if you’re still interested in Quantum Software despite it’s poor dividend qualities, you should be well informed on some of the risks facing this stock. For instance, we’ve identified 3 warning signs for Quantum Software (2 can’t be ignored) you should be aware of.

If you’re in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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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.