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

The Adairs Ltd (ASX:ADH) share price has dropped 1% today. This means its shares now offer a fully franked 8.1% dividend yield…

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.               

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.

More on Share Fallers

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Burgundy Diamond Mines, Clarity Pharmaceuticals, EML, and Zip are sinking today

These ASX shares are ending the week in the red. But why?

Read more »

A worried man holds his head and look at his computer.
Share Fallers

Why 29Metals, Brainchip, Platinum, and Premier Investments shares are falling today

These ASX shares are having a tough time on hump day.

Read more »

Man with his head in his head because of falling share price.
Share Fallers

Why 29Metals, Atlas Arteria, IDP Education, and Mineral Resources shares are falling

These ASX shares are having a tough time on Tuesday. But why?

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why ALS, EOS, NRW, and Patriot Battery Metals are dropping today

These ASX shares are starting the week in the red.

Read more »

A man looking at his laptop and thinking.
Technology Shares

Why are these ASX tech shares getting smashed today?

Owners of these two stocks are missing out today.

Read more »

a man weraing a suit sits nervously at his laptop computer biting into his clenched hand with nerves, and perhaps fear.
Share Fallers

Why AGL, Brickworks, IGO, and New Hope shares are dropping today

These ASX shares are having a poor session. But why?

Read more »

Frustrated stock trader screaming while looking at mobile phone, symbolising a falling share price.
Share Fallers

Why Amcor, Arafura, Brainchip, and South32 shares are tumbling today

These ASX shares are having a tough time on hump day. But why?

Read more »

A young woman holds an open book over her head with a round mouthed expression as if to say oops as she looks at her computer screen in a home office setting with a plant on the desk and shelves of books in the background.
Share Fallers

Why Aussie Broadband, Liontown, Metals Acquisition, and Seek shares are falling

These ASX shares are having a poor session. But why?

Read more »