MotorCycle Holdings Ltd (ASX: MTO) is an ASX small-cap share that could pay a very large dividend yield to investors over the next couple of years.
For readers who haven't heard of the business before, it describes itself as Australia's leading motorcycle dealership and accessories provider. It has more than 40 locations across Queensland, NSW, Victoria, and the ACT.
The company is involved with selling new motorcycles, used motorcycles, accessories and parts, insurance, and mechanical protection plans, as well as providing servicing and repairs.
Motorcycle Holdings represents a "diverse portfolio of brands, selling all of the top 10 selling motorcycle brands in Australia".
Image source: Getty Images
Dividend expectations
While forecasts can change, at the moment, the motorcycle company is projected to pay an annual dividend per share of 12 cents per share in FY24 and FY25, according to Commsec numbers.
At the current Motorcycle Holdings share price, this estimated dividend means the company could pay a grossed-up dividend yield of almost 10% over the next two financial years.
While that sounds like a big yield, it doesn't represent a large dividend payout ratio. In both FY24 and FY25, MotorCycle Holdings is projected to pay just under half of its earnings in FY24 and FY25 as a dividend.
Earnings could remain resilient
The ASX small-cap share has acknowledged there could be challenging macroeconomic conditions because of rising interest rates and cost of living pressures which could impact demand.
In light of that, it's focusing on cost control, including reducing store costs across the network, while "maximising cost of goods efficiencies". Despite that, the cost of doing business was expected to rise in the second half of FY23 because of inflation.
But there are some positives. The businesses of Forbes and Davies and Wide Bay Motorcycles will contribute their first full year of earnings in FY23. The acquisitions of Mojo Group and TeamMoto Townsville will provide increased contributions in the second half.
Management believes the company's growth strategy will help insulate it from any further deterioration of the economy. This strategy includes growing its geographic footprint and greater product diversification.
In FY24, MotorCycle Holdings shares are predicted to generate 26.1 cents of earnings per share (EPS) and 26.6 cents of EPS in FY25.
If it's successful at generating the FY24 profit figure — which it may not — it'd be priced at under 7x FY24's estimated earnings. That's an incredibly low price/earnings (p/e) ratio for a business that claims to be the market leader in Australia and continues to make bolt-on acquisitions.
Foolish takeaway
While this isn't exactly a well-known business, I think the ASX small-cap share could be a contender for a very strong dividend yield over the next two years, and its earnings may be undervalued by the market.
