2 low-yield ASX shares I'm backing to be future dividend stars

Dividend growth seems to be on track with these stocks.

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Key points

  • Businesses that are expected to deliver strong profit growth could fund large dividend hikes
  • After suffering from cost inflation, Inghams is expecting to keep passing on price rises for its chicken, which could fund much larger shareholder payments 
  • Building restoration business Johns Lyng is seeing strong profit growth and it’s expanding into other services like strata management

A dividend yield that's low today isn't necessarily going to be low in a few years because that business may dramatically hike its payment to shareholders. In this article, I'm going to write about two low-yield ASX shares that could be future dividend stars.

Companies that are expected to demonstrate a large increase in their profits can then fund a big increase in their dividends, even if their dividend payout ratio doesn't change.

I think it's possible for some companies to achieve a good balance between investing for growth within the business and also rewarding shareholders. With that in mind, I like the look of these two for future dividend growth.

Inghams Group Ltd (ASX: ING)

This company is best known for being one of the largest integrated poultry businesses in Australia. It provides large volumes of chicken products and also produces turkey and stock feed.

Its role is to supply major retailers, quick service operators (like KFC), food service distributors, and wholesalers.

The business suffered during this period of higher inflation, with its input costs being much higher than before COVID-19. However, the company has successfully passed on price increases, which has enabled growth in its average selling price.

However, the pricing of wheat and soymeal is expected to "remain elevated" compared to longer-term levels due to "tight global supply and elevated logistics costs". It's also expecting further increases in labour, fuel, freight, packaging, and utilities.

Pleasingly for shareholders, the poultry business has said it's focused on ensuring customer pricing levels appropriately reflect these ongoing cost pressures and "will pass on further price increases as required". After talking with customers about their "strategic focus" on the poultry segment, management is optimistic about the medium to longer term.

According to Commsec, the chicken business could grow its annual dividend per share from 10 cents per share in FY23 to 15 cents per share in FY24. This would represent a grossed-up dividend yield of around 8% in the next financial year from the ASX share.

Johns Lyng Group Ltd (ASX: JLG)

Johns Lyng says its core business is "built on its ability to rebuild and restore a variety of properties and contents after damage by insured events including impact, weather and fire events". In my mind, it's highly leveraged to any growth in the number of destructive weather events in both the US and Australia.

Forecast normalised earnings before interest, tax, depreciation and amortisation (EBITDA) was recently upgraded to $133.2 million, excluding commercial construction (the company is planning to exit this business line). This represents an increase of 56% over FY22.

I also like that the business is expanding into adjacent categories and services such as strata management, as well as the provision of fire, electrical, and gas compliance, testing, and maintenance.

Commsec numbers suggest the ASX share could make earnings per share (EPS) of 20.8 cents in FY23 and that this could grow by 21% by FY25.

The dividend payout ratio is expected to be relatively low, with an annual dividend per share of 9 cents in FY23. It's forecast to grow by 24% to FY25 where the payment could be 11.2 cents per share. This would represent a grossed-up dividend yield of 3%, and I expect more dividend growth after that as profit increases.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Johns Lyng Group. The Motley Fool Australia has recommended Johns Lyng Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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