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Is this the cheapest retail stock on the ASX?

There are around 40 pure retailers listed on the ASX, covering everything from jewellery, shoes, clothing and apparel, discount variety items, consumer electronics, furniture, lighting, second-hand goods to auto parts.

Then there several more who are primarily listed as manufacturers, distributors and wholesalers.

But the cheapest of them all could be Godfreys Group Ltd (ASX: GFY) – the retailer specialising in vacuum cleaners and floor care products. Trading on a trailing P/E ratio of under 8x, and paying a dividend yield of more than 5%, shares look very attractive. Underlying earnings per share was 32 cents – with a share price of $2.64. At a payout ratio of 75% – in the middle of management’s guidance, that equates to a dividend of 24 cents and yield of over 9% (although unfranked). The difference in yields is because Godfreys was only listed for just over six months.

When you consider competitors like Harvey Norman Holdings Limited (ASX: HVN) and JB Hi-Fi Limited (ASX: JBH) boast P/E ratios of close to double that, one has to ask the reason why.

In fact, there are several reasons why Godfreys is cheap.

  1. With a market cap of just $103 million and very low liquidity, most fund managers aren’t able to invest in the company – an opportunity for retail investors.
  2. Most investment bank analysts don’t cover it, again due to its size – so there’s a lack of information in the marketplace about the company.
  3. The company only listed in December 2014, so investors aren’t familiar with the company.
  4. Let’s face it, vacuum cleaners aren’t exactly ‘sexy’ when compared to tech stocks or ‘disruptive’ plays.
  5. Same-store-sales for the last financial year were uninspiring to say the least, being flat, although the second half improved to be up 1.1%.

The company has a good track record of increasing sales and earnings, but like most retailers will be affected in a large part by consumer sentiment. The 2015 financial year wasn’t a great one for many. JB Hi-Fi saw same-store sales of 2.9% and Dick Smith Holdings Ltd (ASX: DSH) of 1%. For Godfreys, online sales was a standout – growing at 33% compared to the previous year.

Looking forward, Godfreys says it is launching a new store concept, will see a full year impact of net 6 new stores, the positive impact of conversion of 8 franchise stores to company-owned, launch of new products and ranges as well as new stores. The company currently has 132 company-owned stores, with another 80 owned by franchisees. Those strategies should see sales, earnings and the dividend increase again this financial year.

Foolish takeaway

Godfreys may lack the sex appeal of many other retailers, but at today’s price is flying under the radar, offering a cheap price and an impressive dividend yield. Add this one to your watchlist.

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Motley Fool contributor Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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