AUS
NZ
UK
CA
USA
IND
The ASX-listed dividend stock, Step One Clothing Ltd, has experienced a notable decline in its share price over the past few months, dropping 28% since April 2024. This decline is illustrated in the accompanying chart.
Why a Valuation Decline Can Be Beneficial
When a share price falls, it can increase the dividend yield. For instance, if a dividend yield was initially 6% and the share price fell by 10%, the yield would rise to 6.6%, assuming the dividend payout remains the same in dollar terms. However, it's important to consider more than just the dividend yield when evaluating a stock like Step One Clothing (ASX:STP).
About Step One Clothing
Step One Clothing is a direct-to-consumer online retailer specializing in innerwear. The company emphasizes high-quality, organically grown, certified, sustainable, and ethically manufactured products that cater to a broad range of body types.
Global Growth Potential
One of the key factors that can drive significant returns for a smaller ASX-listed company is its ability to expand into larger international markets. A large addressable market provides ample room for growth if the company executes its plans effectively.
Step One Clothing has shown promising signs of growth and customer attraction. In its FY24 first-half results, the company's total revenue increased by 25.5% to $45 million despite challenging economic conditions. Australian revenue rose by 8.9% to $26.2 million, revenue in the United Kingdom increased by 38% to $14.6 million, and revenue in the United States surged by 256% to $4.1 million.
If Step One can continue to grow its revenue at a double-digit percentage rate over time, it could deliver solid returns for shareholders. Additionally, there are other potential markets for expansion, such as Canada.
Improving Margins
When a business can enhance its profit margins, profit can grow faster than revenue. Rising profit is advantageous for shareholders as it can lead to increased market valuation and potentially larger dividend payouts.
While margin improvement may not occur with every financial report, the HY24 report demonstrated Step One's ability to achieve operating leverage. During this period, the gross profit margin improved by 0.5 percentage points to 81.2%, and the EBITDA margin increased by 1.7 percentage points to 22.5%.
The company's HY24 EBITDA rose by 35.6% to $10.1 million, and net profit after tax (NPAT) grew by 34.7%. This financial strength enabled Step One to pay a dividend of 4 cents per share.
Generous Dividend Payout
The dividend payout of 4 cents per share represented a payout ratio of 100%. Step One stated that its funding level after paying the dividend was sufficient to support future expansion and ensure ongoing financial stability.
The company aims for a full-year payout ratio of 100% of net profit, reflecting the board's commitment to aligning investor interests with the company's financial success.
According to Commsec, Step One Clothing is expected to pay a grossed-up dividend yield of 6.3% in FY24, 6.9% in FY25, and 7.4% in FY26.
Step One Clothing Ltd presents an intriguing opportunity due to its global growth potential, improving profit margins, and generous dividend payouts. Despite the recent decline in its share price, the company’s strong operational performance and strategic expansion plans suggest it could deliver substantial returns for investors in the long run.
