2 underrated ASX dividend shares to think about: analysts

Metcash and Sims are two ASX dividend shares that may be underrated by investors.

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Key points

  • Some of the underrated ASX dividend shares could be good options for income
  • Sims is one of the world’s largest metal recycling businesses
  • Metcash is a leading supplier to independent supermarkets and liquor stores, as well as owning Mitre 10, Total Tools and Home Timber & Hardware

Some ASX dividend shares are very well known by investors. However, there are others that may be unknown but still be able to offer attractive income over time.

Analysts look at most businesses on the ASX to consider if they are opportunities. A company that is both good value and offers a good yield might be able to achieve decent total returns.

With that in mind, here are two ideas:

Sims Ltd (ASX: SGM)

Sims is best known for being a global leader in metal recycling. It has operations in several countries, with a network of processing facilities, some with deep-water port access, supported by an extensive network of feeder yards.

Sims Metal buys, processes and sells ferrous and non-ferrous metal to manufacturers in 30 different countries. It says it sells around 10 million tonnes of secondary metals annually. It buys that metal from metal dealers, peddlers, auto wreckers, demolition firms and others who generate obsolete metal, and from manufacturers who generate industrial metal.

The ASX dividend share said it was seeing strong earnings momentum in the first half of FY22. Underlying earnings before interest and tax (EBIT) for the first half of FY22 is expected to be between $310 million to $350 million, driven by strong margins which was achieved through good market prices and “sound margin management” across all businesses.

However, freight supply costs and general inflation are offsetting some of the gains.

Sims has been busy making acquisitions including the assets of Atlantic Recycling Group, a US recycling business in Baltimore, Maryland. This cost US$37 million plus working capital adjustments.

Citi currently rates Sims as a buy with a price target of $18.50. Excluding the effect of franking credits, the broker is expecting Sims to pay a dividend yield of 3.6% in FY22 and 2.3% in FY23.

Metcash Limited (ASX: MTS)

Metcash is another ASX dividend share that could be worth thinking about.

It’s the business that supplies IGAs around the country, as well as liquor businesses including Cellarbrations, The Bottle-O, IGA Liquor, Duncans and Thirsty Camel. The hardware segment is growing profit particularly quickly, it includes Total Tools, Mitre 10 and Home Timber & Hardware.

The business is now targeting a dividend payout ratio of around 70% of underlying net profit after tax. In the recent FY22 half-year result it increased the interim dividend by 31% to 10.5 cents. The hardware division saw EBIT surge 53.3%. In hardware, it’s upgrading and expanding its store network.

The ASX dividend share is working on the digital side of its overall business. In HY22, group online sales were around $60 million, which was an increase of 46%. Metcash says there is “substantial growth potential” here.

The broker Ord Minnett rates the Metcash share price as a buy, with a price target of $5. This broker reckons Metcash will pay a grossed-up dividend yield of 7.6% in FY22.

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

Before you consider Sims, 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 Sims wasn't one of them.

The online investing service he’s run for over 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 January 13th 2022

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. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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