Why Link Administration is one of the best ASX dividend growth shares

With ASX shares reaching new highs, shares in Link Administration Holdings Ltd (ASX: LNK) are instead trading at a discount. Link is growing earnings and has ample room to increase its already large fully franked dividend.

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After a 21.55% run this year, the S&P/ASX 200 (INDEXASX: XJO), which collects the 200 largest companies in Australia, has delivered an incredible return.

However, with blue chip companies such as Commonwealth Bank of Australia (ASX: CBA), Woolworths Group Ltd (ASX: WOW), and Telstra Corporation Ltd (ASX: TLS) trading at excessive prices and with low or negative expected growth, where does an investor have to turn to find growth at a reasonable price going forward?

Look no further than Link Administration Holdings Ltd (ASK: LNK), which I believe to be one of the best dividend growth stocks currently on the ASX.

What does Link Administration do?

Link provides share market and financial administration services in Australia and the UK. With a market cap of $3.13 billion, Link currently ranks at number 129 amongst the ASX 200. 

In Australia, Link is the largest provider of superannuation financial services and second-largest provider of share market services. Further, Link owns almost 45% of PEXA, the leading Australian platform for online property conveyance, which is currently loss-making but growing at a fast rate.

Why is Link Administration an opportunity

As opposed to other sluggish top ASX stocks, Link has seen top line growth of 21% and bottom-line growth of 96% annualised for the past 3 years. However, going forward, analysts expect earnings to grow at a slower rate of 7.61%.

Link's current price-to-earnings (P/E) ratio of 9.8 compares favourably to the wider market P/E of 18, indicating extreme pessimism or signs of undervaluation.

Meanwhile, Link's dividend yield is 3.52% fully franked and grossed up to 5.03%. Although the dividend was not raised in 2019, earnings payout ratio hovers around 36%, allowing ample room for the already large dividend to increase over time.

Is December the right time to buy Link shares?

Due to several one-off expenses and difficult trading conditions, the Link share price is down about 12% in 2019, significantly underperforming the broader market.

Given the undervaluation, Link itself has been repurchasing its shares aggressively and plans to retire up to 10% of its current shares outstanding in the coming months.

As I consider these difficulties temporary in nature, the current share price of $5.88 constitutes a great buying opportunity for investors focused on creating long-term wealth in the share market.

Foolish takeaway 

At current levels, Link's profitable side of the business is trading at lower multiples than most other listed companies on the ASX, including the big banks which have had one of their worst years on record. As a bonus, Link comes with a 45% stake in PEXA, valued at $700 million, which is the largest and fastest growing online conveyancing provider.

Motley Fool contributor Giacomo Graziano owns shares in Link Administration Holdings, Commonwealth Bank of Australia and Telstra Corporation Ltd. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Link Administration Holdings Ltd. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended Link Administration Holdings Ltd. 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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