My top wildly undervalued ASX dividend king to buy in 2023

The Nick Scali Limited (ASX: NCK) share price has been through a big fall in 2022. I believe that the 30% drop for the company makes it a leading ASX dividend share contender for 2023 and beyond.

One of the most useful things about a share price drop is that not only does it make the valuation cheaper, but it also means the dividend yield is boosted.

For example, if a business with an 8% dividend yield sees a 10% fall in the share price, then the yield becomes 8.8% for prospective investors.

This is one of the main reasons why I think the Nick Scali share price could represent a strong dividend opportunity for 2023 and beyond.

Big dividends expected

Only the Nick Scali board can decide what the dividend payments in 2023 are going to be. But, analysts can have a guess.

The business has increased its dividend every year since 2013. I’m not expecting dividend growth to continue forever, and possibly not in FY23, but I think the last decade has shown the company’s dividend credentials in various economic climates, as well as a commitment to paying attractive dividends.

On Commsec, the forecast is that Nick Scali will pay an annual dividend per share of around 83 cents in FY23. This would translate into a grossed-up dividend yield of 10.8%.

It’s worth noting that the dividend estimate for FY24 is around 70 cents, so a reduction could happen in the future. But, this would still result in a grossed-up dividend yield of 9.1%.

Pleasing ongoing financial numbers

One of the main reasons why the Nick Scali dividend could grow again in FY23 is because the ASX dividend share is still seeing strong financial numbers.

In the four months to the end of October, sales revenue was $194 million, reflecting “a continuation of the record deliveries achieved in the fourth quarter”. October year to date sales revenue was 74% above the same period in the prior year, which was before the Plush acquisition in November 2021.

Group written sales orders for the four months were $148 million, 55% above the prior year. Nick Scali written orders were 21.7% above the first four months of the prior year.

Based on delivery levels at the time, it is expecting net profit after tax (NPAT) for the first half of FY23 to be in the range of $56 million to $59 million, up between 57% to 66%.

In other words, despite all the commentary about an economic slowdown, Nick Scali is still seeing growth. The second half of FY23 may be different, but an annual result is made up of 12 months, not just the second half.

Long-term growth initiatives

While there may be uncertainty in the shorter term, I like the long-term plans of the business to help grow overall profitability.

The ASX dividend share had a total of 108 stores between Nick Scali and Plush at the end of FY22. That breaks down to 57 Nick Scali stores in Australia and five in New Zealand, as well as 46 Plush stores in Australia.

The long-term plan is to have 73 Nick Scali stores in Australia and 13 in New Zealand, for a total of 86. Plush could have between 85 to 90 stores in Australia, and 5 to 10 stores in New Zealand. This could mean a total of 186 stores combined, a rise of 72%. It’s expecting to open at least six stores in FY23.

The ASX dividend share is slowly buying properties around the country. For example, it spent $9 million on a multi-purpose site in Townsville. It’s going to relocate an existing Nick Scali showroom and develop a new distribution centre facility to support growth of both brands in regional Queensland.

Online continues to be a promising division. A full e-commerce offering was launched in Australia in May 2022, driving online written sales orders in June and July. In FY22, the company said that Nick Scali online written sales orders were $29.3 million, with an incremental earnings before interest and tax (EBIT) contribution from online transactions totalling $15.6 million.

More online sales could come with good profit margins.

I think that the above plans can help the ASX dividend share’s long-term profit growth and dividends.

The post My top wildly undervalued ASX dividend king to buy in 2023 appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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