Is Adairs really going to pay a dividend yield of 21%?

A woman has a thoughtful look on her face as she studies a fan of Australian 20 dollar bills she is holding on one hand while he rest her other hand on her chin in thought.A woman has a thoughtful look on her face as she studies a fan of Australian 20 dollar bills she is holding on one hand while he rest her other hand on her chin in thought.

The Adairs Ltd (ASX: ADH) share price has dropped a long way in 2022, down by around 58%. This has had the effect of boosting the homewares retailer’s prospective dividend yield in FY23.

But one dividend estimate puts the potential grossed-up dividend yield at more than 20%. Is that really going to happen?

Well, to truly know, we’d need a crystal ball. But let’s look to see if it’s possible.

Dividends aren’t guaranteed

Dividends are a useful way for investors to benefit from owning shares.

It gives the chance for companies (and trusts) to pay shareholders a portion of the annual profit each year.

But dividends are certainly not guaranteed. Companies can reduce payments or even cut them altogether.

Sometimes a dividend projection may simply not come true.

It may be worth noting the above things before getting to the dividend estimate for Adairs.

Projected Adairs dividend

The ASX retail share, which sells homewares and furniture, has had a tough time in FY22 with lockdowns in the first half hurting sales and profit in NSW and Victoria.

However, Morgans is currently projecting the company’s FY22 grossed-up dividend yield could be 15.8% at the current Adairs share price.

But the current financial year is nearly over – how is the FY23 projected dividend yield looking? The current projected grossed-up dividend yield in FY23 is predicted by Morgans to be 21.6%.

That would be a huge dividend yield. For instance, Morgans thinks the Fortescue Metals Group Limited (ASX: FMG) FY22 grossed-up dividend yield is only going to be 13.7%.

How is Adairs going?

Time will tell whether that dividend projection is correct or not.

However, let’s look at a trading update from Adairs. Sales are an important factor for profit generation. In the first seven weeks of FY22, Adairs said its stores’ sales were down 1.8% on the prior corresponding period, while its online sales were 9.7% higher. Mocka sales were up 14.8% year on year and Focus sales were down 7.3%.

The company is working on a number of initiatives to help grow profit. It’s trying to grow its Linen Lovers membership and increase store floor area. Online sales can keep growing.

The transition to a national distribution centre will assist in lowering costs and help the business become more efficient with stock-flow and fulfilling online orders. Management also plans to grow the Focus on Furniture business.

Being able to maintain and grow profit could be a helpful factor for the Adairs dividend and the Adairs share price, but time will tell how large the dividend yield is in FY23.

Even if the Adairs dividend were only to be two-thirds of the size of the projected dividend, then it would still be a large yield.

The post Is Adairs really going to pay a dividend yield of 21%? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ADAIRS FPO. The Motley Fool Australia has positions in and has recommended ADAIRS FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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