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Metcash Ltd (ASX: MTS) shares could emerge as a gratifying dispenser of dividends in the coming years. The S&P/ASX 200 Index (ASX:XJO) equity is anticipated to yield a substantial dividend for the foreseeable future.
Renowned for its provision to IGA supermarkets across Australia, Metcash extends its influence to Cellarbrations, The Bottle-O, IGA Liquor, Duncans, Thirsty Camel, and Porters Liquor. Additionally, it holds ownership of various hardware brands, including Mitre 10, Total Tools, and Home Timber & Hardware.
What about the dividends?
Markedly, the Metcash share price has witnessed an 11% decline in the past year and a substantial 24% slump since April 2022. While this positions it as a more affordable option, it concurrently elevates its dividend yield. For instance, if a business boasting a 6% dividend yield experiences a 10% dip in share price, the yield ascends to 6.6%.
Metcash has committed to maintaining a dividend payout ratio of 70% based on underlying net profit after tax (NPAT).
This enterprise is characterized by a potential for sustained profitability, especially in its food and liquor segments. Despite not being high-growth sectors, these divisions exhibit a degree of stability in terms of profit. On the contrary, the hardware division presents an opportunity for noteworthy profit expansion, especially upon the resurgence of demand for construction and renovation.
Considering these dynamics, Commsec's current projection for Metcash's FY25 annual dividend stands at 20.5 cents per share, resulting in a grossed-up dividend yield of 8.1% after generating 29.2 cents of earnings per share (EPS).
In the upcoming FY24, the projected annual dividend per share is 20.2 cents, equating to a grossed-up dividend yield of 8%.
As per Commsec's forecast, the ASX 200 stock may declare an annual dividend per share of 21.3 cents, translating to a grossed-up dividend yield of 8.4%.
Prospects for Earnings Growth
While a high dividend yield might be tempting, it's prudent not to solely focus on this metric. An alluring 10% dividend yield loses its charm if accompanied by a 20% drop in share price.
Metcash appears to be an attractive and relatively low-risk investment due to its low price/earnings (P/E) ratio and potential earnings growth. The company can capitalize on Australian population growth and business expansion to foster earnings growth in FY25 and FY26, compensating for the anticipated hardware profit decline in FY24. Commsec's projections indicate a modest uptick in earnings during FY25 and FY26.
