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The Adairs Ltd (ASX: ADH) share price has faced significant declines in recent years, down 65% since June 2021 and 41% over the past year. Despite challenges, the current lower share price presents an opportunity for higher future dividend yields.
The home furnishings retailer witnessed substantial dividend payments during the COVID-19 period. While short-term dividend weakness may be anticipated due to economic difficulties for households, the lower share price positions Adairs for more attractive future dividend yields.
In the context of fallen ASX dividend shares, the lower share price contributes to a potentially higher dividend yield in the future. For instance, a business with a 7% dividend yield that experiences a 10% fall in its share price could result in a higher 7.7% dividend yield. A 50% share price decline could translate to a grossed-up dividend yield of 10.5%.
Adairs is currently grappling with investor concerns about profitability amid inflation and reduced discretionary spending. The company reported a 9% decline in sales during the first 21 weeks of FY24, attributed to factors such as higher interest rates and cost of living pressures.
The company's outlook for the remainder of FY24 is challenging due to prevailing macroeconomic headwinds. Adairs is actively managing its business in response to these difficulties.
The forecast on Commsec suggests that Adairs may pay a dividend per share of 4 cents in FY24. However, as economic conditions improve, there is potential for a rebound in company profit and dividend payouts. The estimated annual dividend per share in FY26 is projected to be 19.4 cents, resulting in a grossed-up dividend yield of 16.7% at the current share price.
Adairs is implementing strategies to enhance profitability, including the opening of larger store formats with superior economics, category expansion, and the use of artificial intelligence to improve the customer experience and team productivity. The company is also exploring physical store locations for its brands, including Focus on Furniture and Mocka.
While the actual dividend may vary from estimates, Adairs has the potential to recover and benefit strongly when retail conditions improve.
