1 oversold ASX dividend stock (yielding 6%) to buy in 2023

The ASX dividend stock Baby Bunting Group Ltd (ASX: BBN) could be a real winner for both capital growth and dividends in my opinion.

The last 12 months have been rough for the business, after an approximate 50% fall for the ASX retail share.

Amid the volatility and uncertainty of last year, it’s understandable that a number of ASX retail shares were sold off.

However, Baby Bunting continues to languish at close to its 52-week lows, while other retailers like JB Hi-Fi Limited (ASX: JBH) and Nick Scali Limited (ASX: NCK) have recovered a lot of their lost ground.

What’s gone wrong?

It’s fairly understandable why the Baby Bunting share price has taken a bath. The company delivered an update that was disappointing.

Last month, the ASX dividend stock gave an update that revealed its sales were up 6.6% to $254.9 million. But despite becoming a bigger business, its gross profit margin decreased from 39.3% to 37.2%.

It also revealed that pro forma net profit after tax (NPAT) was down 59% to $5.1 million.

While this update showed an improvement in market share, it still suffered despite “being competitive and delivering value to the consumer”.

However, in the second quarter, it made some “important refinements” to its loyalty program, which was done in mid-December. The full benefit of these changes are expected to improve the company’s gross profit margin by between 50 basis points to 80 basis points.

Baby Bunting also said that it has made “strategic adjustments” to pricing and changes to domestic freight arrangements, which have helped the margin.

On top of that, reductions in international shipping rates will “pave the way for further margin improvement” in the second half. It’s also expecting the gross profit margin for FY23 to be between 38% to 39%, after seeing a 38.6% margin in FY22.

The business is also spending money on opening new stores. It’s expecting to open eight new stores in FY23.

In FY23, the business is expecting to make pro forma net profit after tax of between $21.5 million to $24 million.

Why I think the Baby Bunting share price is oversold

The ASX dividend stock faced a competitive environment approximately five years ago, but came through that and then performed very well. I think Baby Bunting will be able to come through this period as well.

Its scale gives it profit margin advantages compared to competitors, the large store network means it can connect with a large number of customers, and its improving online offering is becoming more compelling with a ‘marketplace’.

While there are profit problems in the short term, Baby Bunting is already telling the market that things are turning around.

Commsec earnings projections suggest that profit is going to recover in FY24 and grow further in FY25, enabling the ASX dividend stock to pay a good dividend.

Based on FY25 numbers, the Baby Bunting share price could be valued at under 11 times FY25’s estimated earnings, with a possible grossed-up dividend yield of 9.1%. If the expansion into New Zealand goes well, I think the business has a very promising future over the next three to five years.

In terms of the dividend that it could pay in FY23, the current Commsec estimate is 11.6 cents, translating into a possible grossed-up dividend yield of 6.1%.

The post 1 oversold ASX dividend stock (yielding 6%) 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 positions in and has recommended Baby Bunting Group. The Motley Fool Australia has recommended Baby Bunting Group. 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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