2 top ASX dividend shares to think about

Inghams and Adairs may be two good ASX dividend shares.

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It can be difficult to find options for income in this era of record-low interest rates. ASX dividend shares could be a good way to generate that required cashflow.

Businesses have the ability to pay some of the profit they make each year to investors.

However, just because a business pays a dividend or distribution, doesn’t automatically make it a buy for income.

But these two ASX dividend shares could be good to think about:

Adairs Ltd (ASX: ADH)

In FY22, Commsec estimates suggest that Adairs has a forward grossed-up dividend yield of 8%. That’s based on an annual dividend per share of around $0.22.

Adairs is a leading retailer on homewares and furnishings. It has a large store network across Australia and New Zealand, as well as a large online presence. The company made 37.4% of its total sales online. The company saw total sales increase by 28.5% to $500 million.

The company experienced a strong increase of profitability during FY21 with the group underlying earnings before interest and tax (EBIT) rising by 98.2% to $96.7 million. Some of this growth was driven by a 520 basis point increase of the underlying gross profit margin to 66.7%.

But it’s looking to continue to grow profit. The supply chain is a key focus, with a new DHL-operated national distribution centre operational this month (September 2021). This should lead to annualised cost savings of around $3.5 million per annum.

Store floor space growth could be another area of growth. The ASX dividend share says that store sales are highly correlated to store floor space with each additional square metre adding around $4,000 in store sales. It expects to grow its gross lettable area (GLA) by 8% (or more) in FY22 and by 5% (or more) for the following five years through new and upsized stores.

The Adairs share price is valued at 11x FY22’s estimated earnings.

Inghams Group Ltd (ASX: ING)

Inghams is one of Australia’s largest poultry businesses. It provides chicken, turkey and plant-based protein products. The poultry business has a number of customers including major retailers, quick service (fast food) restaurants, food service distributors and wholesalers.

The ASX dividend share’s vertically integrated operating model enables the business to create value and realise efficiencies across a complex and large scale supply chain, according to management.

Inghams saw FY21 statutory earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 14.5% to $443.9 million. Meanwhile, statutory net profit rose by 107.7% to $83.3 million. This enabled the business to grow its total dividend by 17.9% to 16.5 cents per share.

In FY22, Commsec estimates suggest that Inghams is going to pay a grossed-up dividend yield of 6.4%.

Inghams says it’s looking to pay reliable dividends to shareholders, with a dividend payout ratio of 60% to 80% of underlying net profit after tax. It’s focusing on revenue growth and “continuous improvement benefits”.

It’s expecting to growth volume with new business across various channels. It’s looking to secure growth opportunities with existing customers and product innovation.

Inghams is investing across its network to improve and grow its operations, including the WA hatchery as well as a systems modernisation project.

Citi currently rates Inghams as a buy with a price target of $4.55. Using the broker’s forecast, Inghams is valued at 16x FY22’s estimated earnings.

Should you invest $1,000 in Inghams right now?

Before you consider Inghams, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Inghams wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended ADAIRS FPO. The Motley Fool Australia owns shares of and has recommended ADAIRS FPO. 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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