The ASX dividend stock Step One Clothing Ltd (ASX: STP) has seen its share price fall significantly over the last few months, as shown in the chart below. It's down 28% since April 2024.
Why valuation decline can be a good thing? When a share price falls, it boosts the dividend yield. For example, if a dividend yield was 6% and the share price fell 10%, then the yield from the ASX dividend stock would become 6.6%, assuming the dividend payout remained the same in dollar terms.
Now, I'm not purely interested in the dividend – there are other factors to like about Step One Clothing. Before I get to that, here's what the company does. It's a direct-to-consumer online retailer of innerwear that is "high quality, organically grown and certified, sustainable, and ethically manufactured", which suits a broad range of body types, according to the company.
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Global growth
In my opinion, one of the most important factors that can unlock potential big returns for a smaller ASX share is whether it's growing overseas in larger markets than Australia. A large addressable market gives a stock plenty of room for growth, if a company can execute well on its plans.
Of course, short-term progress does not guarantee a company will become a multi-billion-dollar winner. But, Step One is showing good signs of growth and attracting customers.
In the FY24 first-half result, the ASX dividend stock's total revenue increased by 25.5% to $45 million – despite challenging economic conditions. Australian revenue rose 8.9% to $26.2 million, revenue in the United Kingdom increased 38% to $14.6 million, and United States revenue jumped 256% to $4.1 million.
If the business can grow its revenue (over time) at a double-digit percentage rate, then it could deliver good returns for shareholders.
There are plenty of other countries that Step One can grow into, such as Canada.
Rising margins
When a business can grow its profit margins, profit can grow faster than revenue. Rising profit is good news for shareholders because it can encourage the market to pay more for the business and fund larger dividend payouts.
I'm not expecting profit margins to increase with every result, but the HY24 report showed that the business is capable of achieving operating leverage.
In that half-year period, it reported the gross profit margin improved by 0.5 percentage points to 81.2%, and the earnings before interest, tax, depreciation and amortisation (EBITDA) margin improved 1.7 percentage points to 22.5%.
The ASX dividend stock's HY24 EBITDA jumped 35.6% to $10.1 million, and net profit after tax (NPAT) grew by 34.7%. This enabled the business to pay a dividend per share of 4 cents.
Generous dividend payout
The payout of 4 cents per share represented a dividend payout ratio of 100%. Step One said its funding level after paying the dividend was "deemed sufficient to support future expansion and ensure ongoing financial stability".
Step One said it's targeting a full-year payout ratio of 100% of net profit, which demonstrates "the board's commitment to aligning the interests of its investors with the company's financial success".
According to Commsec, the ASX dividend stock is expected to pay a grossed-up dividend yield of 6.3% in FY24, 6.9% in FY25, and 7.4% in FY26.
