1 ASX dividend stock to buy that's down 60%

I think passive income from this business could be enormous in FY26.

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The Adairs Ltd (ASX: ADH) share price has sunk 60% since June 2021 and is almost 30% lower since March 2024.

With such a massive fall over the past few years, could the ASX dividend stock be capable of providing solid passive income?

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When a share price falls, it can increase the prospective dividend yield. For example, if a company had a share price of $10 and paid a dividend per share of 60 cents, it'd have a dividend yield of 6%. If the share price fell 50% to $5, and the dividend payment was still 60 cents per share, the dividend yield would become 12%.

However, it's common for a dividend payment to be reduced during a period of heavy share price decline because the sinking valuation is a sign that profits are under pressure.

But, it's still possible to find cyclical ASX dividend stocks that can deliver recovering profit and a resurgent dividend.

Adairs may be one of those cyclical businesses that could recover over the next couple of years.

Is recovery on the way?

The trading environment for discretionary ASX retail shares has been tough, with many households having less money to spend amid this inflationary environment. Expensive mortgages and soaring rent have certainly made things challenging for the retail sector.

The company's latest earnings results did not indicate booming trading conditions. In February, Adairs said it continued to see "significantly lower" customer traffic than the same period last year. Consumers remained "value-orientated, with conversion declining notably when offers are reduced".

In weeks 27 to 34 of FY24, group sales were down 9.6% year over year, with Adairs sales down 9.5%, Focus on Furniture sales down 14.1%, and Mocka sales up 4%.

However, there were some silver linings. Due to the material decline in sales that occurred in May 2023, Adairs management expects that the group's comparative sales performance will improve across the second half of FY24. It's also focused on managing the gross profit margin, which was up 200 basis points (2.00%) year over year.

Adairs expects trading to remain subdued, but initiatives could help profit recover, such as its product range, supply chain improvements, the Adairs-operated national distribution centre, cost of doing business (CODB) management and a store rollout.

The broker UBS suggests Adairs could generate net profit after tax (NPAT) of $36 million in FY24, $44 million in FY25 (up 22%) and $52 million in FY26 (up 18%).

Large dividends predicted

UBS has forecast that Adairs could pay an annual dividend per share of 18 cents in FY25, which would be a grossed-up dividend yield of 14%.

The broker has suggested Adairs could then pay an annual dividend per share of 21 cents per share in FY26 — a grossed-up dividend yield of 16%.

Dividends are not guaranteed, but if the company can reset its profitability, it could be a significant dividend payer in the coming years. However, it can't be ruled out that tough trading conditions could continue throughout FY25.

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 Adairs. The Motley Fool Australia has positions in and has recommended Adairs. 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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