Collins Foods Ltd (ASX: CKF) shares have the potential to deliver significant dividend income in my opinion.
Many of ASX's biggest companies are also the biggest dividend payers, such as Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP). But, a long time ago, these behemoths were a lot smaller.
While I'm not predicting that Collins Foods is going to become as big as those two, I do think it has plenty of growth potential.
There are three main areas to the business – KFC Australia, KFC Europe and Taco Bell Australia. It is a large franchisee of KFCs and Taco Bells in Australia.
At the end of FY22, it had 261 KFC restaurants in Australia after opening 10 more during the year.
KFC Europe has operations in both the Netherlands and Germany. It recently commenced a Netherlands corporate franchise agreement (CFA) which gives Collins Foods primary operational control over the entire market and incentives for market development, with a target of up to 130 net new restaurants over the next 10 years. At the end of FY22, it had 45 restaurants in the Netherlands.
Collins Foods is also responsible for Taco Bell in Australia. In FY22 it had 23 locations around Australia. FY22 saw Taco Bell's revenue rise by 27.5% to $35.8 million.
Let's now look at the dividend.
FY22 dividend
In FY22, the business paid a total fully franked dividend per share of 27 cents per share. That represented an increase of 17.4%.
This came after a 25% increase in underlying net profit after tax (NPAT) from continuing operations to $59.7 million. Statutory net profit jumped 47.2% to $54.8 million for the ASX share.
It has increased its dividend each year since 2014.
Future dividend expectations
It's expected to pay an annual dividend of 30.9 cents in FY24 according to Commsec. This would be a grossed-up dividend yield of 4.4%.
The business is planning to open another 20 to 29 new restaurants in FY23 alone, with nine to 12 for KFC Australia, two to five for KFC Europe and nine to 12 Taco Bells.
The Collins Foods managing director and CEO Drew O'Malley said:
Collins Foods possesses the key ingredients to weather turbulent times – a strong balance sheet, world-class brands, and a passionate and dedicated team of experienced operators. We continue to monitor the landscape for acquisition opportunities that fit our portfolio and capabilities. And ultimately, we believe that by staying focused on providing unmatched experiences for our customers and people, our long-term prospects are as bright as ever.
I think that Collins Foods is capable of producing dividend growth of an average of more than 10% per annum over the next decade through a combination of same-store sales growth, store network rollout and potentially more acquisitions.
If the business can keep growing its underlying earnings per share (EPS) at an attractive rate, then this can continue funding bigger dividends over time.
Collins Foods share price snapshot
Collins Foods shares have dropped 26% in 2022 to date. But, over the last month, it has risen around 10%.
