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Should you buy this small cap ASX share for its 8.1% dividend yield?

The Adairs Ltd (ASX: ADH) share price has edged lower on Friday following the release of its AGM update.

In morning trade the homewares retailer’s shares are down 1% to $1.79.

What was in Adairs’ update?

This morning Adairs revealed that it has started FY 2020 in a reasonably positive fashion.

According to the update, Adairs have has delivered like-for-like sales growth of 3.3% during the first 16 weeks of FY 2020.

The majority of this growth has come from its online sales. They are up 16.6% on the prior corresponding period, whereas store sales are up 0.8% on a like-for-like basis.

Management advised: “Whilst this represents a slight slowing in like-for-like sales growth, our clear focus in the current environment, particularly against a backdrop of continued AUD/USD weakness, has been on growing our like-for-like Gross Margin dollars. We are pleased to report that by working with our product suppliers and managing our discounting and promotional activity levels we are making good progress on this.”

That’s a big positive as a retailer that grows its sales profitably is a much more attractive investment prospect than one that does it through discounting.

Although management notes that the key Christmas trading period is still to come, it feels suitably prepared and remains comfortable with its FY 2020 guidance.

That guidance includes its aim for a total of 169 to 171 stores being open at the end of the financial year.

From these stores and its online business, the company expects to generate sales of $360 million to $375 million. This implies annual growth of 4.5% to 9% on FY 2019’s sales of $344.4 million.

In respect to its earnings, the company continues to target earnings before interest and tax of $43 million to $46 million. The bottom end of the guidance ranges implies a 1% decline, whereas the top end implies growth of 6% on FY 2019’s EBIT of $43.4 million.

Should you invest?

Whilst its performance in FY 2020 is unlikely to be anything to get excited about, I feel Adairs could still be a decent option for value and income investors.

Its shares are currently changing hands at 10x trailing earnings and offer a trailing fully franked 8.1% dividend yield. This is one of the biggest yields you’ll find on the market and looks sustainable even if it hits the lower end of its guidance.

Alternatively, fellow retailers Accent Group Ltd (ASX: AX1) and Super Retail Group Ltd (ASX: SUL) could be worth considering for similar reasons.               

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Super Retail Group Limited. The Motley Fool Australia has recommended Accent Group. 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 Scott Phillips.

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