Here's why I invested in Accent shares for dividend income

I ran towards this stock with my investment cash recently.

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Accent Group Ltd (ASX: AX1) shares were too attractive for me to ignore late last year, so I decided to invest in the ASX retail distributor. I like the potential dividend income on offer and its much-reduced valuation.  

In late November, I bought some shares in Accent at an average price of around $1.74. This came just after the company's annual general meeting (AGM) and a trading update that disappointed.

At the time I invested, the Accent share price was down 17.5% from 16 November 2023 and down close to 40% from April 2021.

The company acts as a distributor in Australia for global shoe brands, including Skechers, Vans, Kappa, Hoka, Dr Martens, Henleys, and Egg. Accent also has a number of its own brands, including The Athlete's Foot, Stylerunner, Trybe, Nude Lucy and Glue Store.

Strong dividend income

Past dividends are not a guarantee of future dividends, be that the size of the payout or consistency of the dividend increases. However, if a business makes an effort to grow the dividend regularly, I think that's a good sign that dividend growth is likely to continue in future (if the profit is there to fund it).

If we look at the last several years of dividends, Accent grew its dividend every year from 2018 to 2021. The company cut the dividend dramatically in 2022, but in 2023 paid a dividend that was 169% larger than in 2022 and 55% bigger than in 2021.

I'm not expecting the 2024 dividend will be larger than 2023. The current economic environment and inflation of the company's costs are likely to mean a reduced payout.

The projection on Commsec suggests Accent could pay a dividend per share of 11.5 cents in FY24, which would be a grossed-up dividend yield of 7.9%. The payout could be smaller (or larger) than that. But, I'm thinking about the possible retail recovery in the subsequent years.

In FY25, the dividend per share could be 13.1 cents per share, according to Commsec, which would be a grossed-up dividend yield of 9%. The FY26 grossed-up dividend yield might be 10.25% if earnings recover.

Lower valuation

At a time when the cost of living has increased, households may have less money to spend. The company's expenses are also increasing because of inflation of costs like wages. This combination is likely to translate into lower profit in FY24, but I think the Accent share price has fallen far enough to compensate for this, particularly if the retail weakness is only for a year or two.

If we use the current Accent share price and the earnings forecasts on Commsec, it's priced at 16x FY24's estimated earnings and 14x FY25's estimated earnings.

I like the outlook for the company – it has a number of wonderful global brands and local shoe stores as part of its portfolio. I think it can continue to perform adequately in 2024, even if there is a downturn. We all need shoes!

The business continues to increase its total store network at an impressive rate. It's planning to add dozens more stores to its network this year. I think its level of digital sales continues to impress. They come with a good margin because they don't require the same store operation costs.

While I'll make no prediction of how much the Accent share price may rise, I think a recovery in consumer sentiment (and spending) within two or so years could help the retailer (and shareholders).

Motley Fool contributor Tristan Harrison has positions in Accent Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Accent 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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