Here’s why I think Lovisa could be a top ASX dividend share

This retail ASX share could provide good dividend income for investors.

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Two women shoppers smile as they look at a pair of earrings in a costume jewellery store with a selection of large, colourful necklaces made of beads lined up on a display shelf next to them.

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Key points

  • Lovisa is expected to pay a solid dividend yield in FY22 and the next few years
  • Growing profit could help drive the dividend higher too
  • Growth initiatives include investing in its e-commerce capabilities, growing the store network, and focusing on costs

I think the current Lovisa Holdings Ltd (ASX: LOV) share price could make it an attractive ASX dividend share for the longer term.

For readers that haven’t heard of Lovisa before, it’s an ASX retail share that sells affordable jewellery, which is generally targeted at younger shoppers. While it does have an Australian retail network, the company has turned into a global force and it has plans for a lot of growth in the long term.

But, with the company’s growth plans, I think it has plenty of potential to deliver good dividends over time if it continues to pay out a reasonably high level of profit as a dividend.

Dividend projections

Let’s look at how big the Lovisa dividend yield could be over the next couple of financial years.

According to CMC, Lovisa could pay a grossed-up dividend yield of 4.9% in FY22 and 4.85% in FY23. By FY24, CMC’s numbers indicate it could be 5.75%.

Some brokers are expecting even bigger dividends in FY23. UBS has pencilled in a 5% grossed-up dividend yield for FY23, while Morgan Stanley thinks it could be as high as 5.85%.

But what all the projections show are expectations of profit growth over the next few years.

Earnings growth to fund shareholder payouts

A key reason why I think Lovisa could be a leading ASX dividend share is because of the expectation of earnings growth. Profit growth can help drive the Lovisa share price higher, but it can also fund growing dividends.

For example, estimates on CMC suggest that Lovisa could generate 47.6 cents of earnings per share (EPS). That puts the Lovisa share price at 29x FY22’s estimated earnings.

However, in FY24, profit projections on CMC suggest 73.5 cents of EPS – that would represent growth of 54% over two years. If Lovisa did achieve that FY24 figure, it’s valued at just 19x FY24’s estimated earnings.

What could drive Lovisa earnings higher?

I think Lovisa can grow its profit, and therefore its dividend, through a number of initiatives. It is investing “strongly” in its digital platform and strategy to drive continued global growth.

It’s also focused on identifying new markets in which to pilot its Lovisa brand.

The company boasts that it has a strong balance sheet and no debt and it’s continuing to control its costs.

In its last presentation in May, the company said its international rollout was continuing, with 59 new stores opening in the year to date.

The company’s same-store sales can continue to drive earnings higher. It said that in the first eight weeks of the second half of FY22, comparable store sales were up 12.1% and that sales momentum continued to the end of April 2022.

I think if the business expands its global store network, grows digital sales, increases same-store sales and achieves scale benefits, the profit and dividends can grow. This could also assist the Lovisa share price, which closed 1.15% lower at $13.81 on Thursday.

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 recommended Lovisa Holdings Ltd. 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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