ASX dividend share Collins Foods Ltd (ASX: CKF) is one of the most appealing opportunities in Australia for income investors, in my view.
Some other sectors don't appear as attractive right now. The major ASX bank shares still trade on relatively high valuations, while the large ASX mining shares have shot higher following the announcement of financial stimulus measures in China.
I think investors wanting to deploy new money could find better value opportunities elsewhere.
The Australian KFC and Taco Bell operator has suffered a sell-off. The Collins Foods share price is down almost 30% since the 2024 high in January 2024, as shown in the chart below.
Strong passive income credentials
One benefit of a lower share price is that it boosts the prospective dividend yield for interested investors. For example, if a business has a yield of 5% and the share price falls 10%, then the yield becomes 5.5%.
In FY24, Collins Foods declared an annual dividend per share of 28 cents. This translates into a trailing fully franked dividend yield of 3.2% and a grossed-up yield of 4.5%, including the attached franking credits.
One of the main reasons why I think this is an impressive ASX dividend share is because it has grown its annual dividend per share every year since 2014. That's a decade of consecutive dividend increases.
This record is not guaranteed to continue, but broker UBS projects that shareholders will see much bigger dividends in the future.
UBS forecasts the annual Collins Foods dividend could rise to 36 cents per share by FY26 and reach 57 cents per share by FY29. With those forecasts, Collins Foods shares could have a grossed-up dividend yield of 5.8% in FY26 and 9.25% in FY29.
Why earnings growth could continue
I think profit growth is very important for the long-term, whether that's for ASX dividend shares or ASX growth shares.
Collins Foods may not see gigantic same-store sales growth in the near term due to economic challenges facing households. I'll point out that FY25 could be challenged with profit margin pressures.
However, the company can still grow its earnings in the longer-term through expansion of its KFC and Taco Bell networks. I like the company's flexibility to grow KFC numbers in both Australia and Europe. UBS pointed out that Collins Foods expects to add new restaurants in Australia during FY25 in line with FY24, when it added nine.
UBS suggests the valuation "looks undemanding" compared to its peers.
Based on the projected earnings per share (EPS) for FY26 of 59 cents, the Collins Foods share price is valued at 15x FY26's estimated earnings.
