The S&P/ASX 300 Index (ASX: XKO) is full of names that pay dividends. But not many may pay a dividend yield of more than 10% in the next few years. Adairs Ltd (ASX: ADH) shares could be one of the rare few to do it.
A dividend yield is a combination of much of the profit a business pays out (the dividend payout ratio) and how expensive, or cheap, the share price is. The valuation can be measured in a number of different ways, including the price/earnings (P/E) ratio.
The lower the P/E ratio, the higher this pushes up the dividend yield. But dividends are not guaranteed payments at all.
Large dividend yield projected
After the heavy fall of the Adairs share price, it could pay a very high dividend yield if current dividend forecasts are any indication.
According to projections on Commsec, the business is projected to pay an annual dividend of 20.8 cents per share in FY24. That translates into a forward grossed-up dividend yield of close to 11%.
The ASX 300 share is then predicted to grow its dividend by more than 10% in FY25 to 23.2 cents per share. If that happens, it'd be a grossed-up dividend yield of almost 12%.
How can Adairs shares fund these large dividends?
Profit growth is predicted for FY24 and FY25.
In the 2024 financial year, Adairs could generate earnings per share (EPS) of 30.5 cents and then achieve 32.9 cents per share in the 2025 financial year.
The ASX 300 share already sells large amounts of furniture and homewares in Australia and New Zealand. But it's aiming for more than $1 billion in sales, after achieving $564.6 million in FY22.
With its three brands of Adairs, Mocka, and Focus on Furniture, it thinks it can achieve that goal in five years.
With its Adairs brand, new and upsized stores could achieve 5% growth per annum of retail floor space. It's also aiming to grow its (paid) membership by 5% to 10% per annum. The company also wants to improve its omnichannel offering for customers and expand its product range.
Mocka, its online furniture business, wants to expand significantly in Australia. The goal is to increase brand awareness in Australia, expand its range, and add a physical presence in stores. This could be a great way to build synergies between Mocka and the ASX 300 share's furniture stores.
Adairs recently acquired Focus on Furniture. It wants to build the business by rolling out at least 30 more stores nationally. It's also aiming to improve the shopper experience in-store and online, increase brand awareness, and expand its product range.
Cheap Adairs share price valuation
I think the ASX 300 share is very attractively priced. According to Commsec estimates, it's valued at nine times FY24's estimated earnings. This seems cheap to me for a business expecting growth in the coming years.
