Is the Harvey Norman (ASX:HVN) share price next to do a capital return cashback?

Speculation of a big capital return cash splash failed to fire up the Harvey Norman Holdings Limited (ASX: HVN) share price.

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Speculation of a big capital return cash splash failed to fire up the Harvey Norman Holdings Limited (ASX: HVN) share price.

Shares in the electronics and furniture retailer tumbled 4.2% to $5.12 this morning when the S&P/ASX 200 Index (Index:^AXJO) fell 0.5%.

Other ASX retailers are also in the red, although not by quite as much. The JB Hi-Fi Limited (ASX: JBH) share price lost 2.7% to $46.60 and the Wesfarmers Ltd (ASX: WES) share price surrendered 1% to $50.41.

Capital return can’t save the Harvey Norman share price

A downgrade by UBS may be the reason for the Harvey Norman share price underperformance. The broker dopped its rating on the shares to “neutral” from “outperform” even as it highlighted the chance of a capital return.

Harvey Norman is flushed with cash after all as it is one of the COVID-19 winners. Sales across the group are soaring as consumers who can’t spend on international travel turn to buying stuff for the home.

“At its November update, profit before tax had increased 161% YoY [year-on-year],” said UBS.

“ABS preliminary data indicated 10% YoY growth in non-food retail in the month of January. We see a reasonable probability of capital management (HVN debt free at the 1H21, excess franking credits).”

Profit up but recommendation down

The broker lifted its 12-month price target on the stock to $5.36 from $5.30. But it believes the Harvey Norman share price has reached fair value after its big rally since March 2020, although a sizable capital return could see the stock shoot higher.

“We forecast 32cps dividends in FY21 on the basis of a 65% payout ratio,” added UBS.

“Net debt (excluding leases) is forecast to be zero at the 1H21 and ~A$120mn (assuming working capital normalisation) at the FY21 (0.1x EBITDA pre AASB16).

“HVN finished FY20 with A$500mn of Australian tax paid franking credits, allowing for meaningful distribution of value to shareholders during this period of above average profits.”

Big dividend supercycle

If UBS is right about the dividend, the Harvey Norman share price is sitting on a yield of 6.25%. This jumps to 8.9% if franking is included.

Harvey Norman paid a final dividend of 18 cents a share in October last year but topped this up with a 6 cents a share special dividend.

The payout in this financial year is almost certainly going to be bigger even without a capital return or special dividend.

Talk about the prospects of an ASX dividend supercycle!

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. 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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