1 ASX dividend stock down 50% to buy in February

I think it could be time to go shopping for this beaten-up stock.

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The month of February is useful for finding ASX dividend stocks that have sold off heavily. It's reporting season and provides a great opportunity for investors to have an in-depth look at what's really going on for some companies.

ASX retail share Universal Store Holdings Ltd (ASX: UNI) is down heavily from its peak. It has a few different brands, including Universal Store, Perfect Stranger, THRILLS and Worship. These are youth fashion apparel brands that sell 'on-trend' products aimed at 16 to 35-year-olds.

The Universal Store share price is 50% lower than it was in November 2021 – half the price that it was before.

Declines lead to bigger yields

If a share price falls, not only does the ASX dividend stock become cheaper, but it also boosts the prospective dividend yield. For example, if a company has a dividend yield of 5% and its share price drops 10%, that pushes the yield up to 5.5%. If it falls by 25%, then the 5% yield becomes 6.25%.

Universal Store has grown its dividend each year since it started paying dividends in 2021. In FY23, it paid an annual fully franked dividend per share of 22 cents, so this translates into a trailing grossed-up dividend yield of 7.6%.

The estimate on Commsec currently suggests the retailer could pay an annual dividend per share of 23.1 cents, translating into a grossed-up dividend yield of 8%. Bear in mind a forecast is just an estimate – the dividend could be smaller or bigger than that.

In FY25, the business might pay an annual dividend per share of 25.9 cents — a grossed-up dividend yield of 8.9%. By FY26, it could pay an annual dividend per share of 28.2 cents. This would be a grossed-up dividend yield of 9.7%.

Can the ASX dividend stock pay this passive income?

Universal Store has shown a willingness to pay healthy dividends to shareholders and grow the dividend.

I think the ASX dividend stock has a very good chance of growing earnings in FY25 and FY26, assuming the economy stays as strong as it is.

In November, the company advised told investors in an update that total sales were up 14.7% to $88.4 million, with its underlying gross profit margin being in line with last year at 59% and the cost of doing business being slightly lower than last year. Underlying earnings before interest and tax (EBIT) was up by roughly $2 million.

The company continues to grow its store network, which grows its scale. In the first half of FY24, it was expected to open seven new stores – two Universal Store locations, four Perfect Stranger stores and one new-format THRILLS store.

It indicated it was planning to open another four to seven stores in the six months to June 2024, which would leave it with between 104 to 107 stores.

The ASX dividend stock is trading at just 9x FY26's estimated earnings, according to Commsec. If we take a longer-term mentality and hold during any short-term volatility, I think it's materially undervalued at this price. The growing dividend could also be very rewarding.

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 no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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