One of the most underrated ASX dividend shares, in my opinion, is Nick Scali Limited (ASX: NCK). I also think that legendary investor Warren Buffett would want to invest in Nick Scali shares if he were focused on ASX shares.
For readers who haven't heard of Nick Scali before, it's a business that sells "quality furniture". It's also been operating for more than 60 years. The business sources its products from around the world and directly from "some of the largest and most respected manufacturers globally".
In fact, it imports 12,000 containers of furniture per year, showing the scale of this ASX dividend share. The more it imports, the more scale advantages can benefit the business.
I think there are a number of reasons why Nick Scali shares would be attractive to Warren Buffett right now.
Better valuation
For starters, I think the legendary investor likes to find a bargain. Or, at least he likes to find great businesses at fair prices.
The Nick Scali share price has dropped 29% in 2022 to date, though it was lower earlier in the year.
I think the prospect of potentially lower profit due to higher interest rates and inflation explains a lot of the decline.
However, declining by around a third certainly makes up for the uncertain conditions in my opinion. Remember, a share price is meant to take into account the long-term prospects of the business, not just the next year or two. But, short-term trading continues to perform well, despite the conditions.
I think the Nick Scali share price looks better value because of its growth plans and the fact that it's priced at 13 times FY24's estimated earnings, according to Commsec.
Profit growth plans
There are a number of different ways that Nick Scali can boost its profit generation in the coming years.
It recently bought the Plush-Think Sofas business. Under Nick Scali's ownership, there has been an improvement of 240 basis points (2.4%) of the gross profit margin for Plush to 54.8%. This has occurred while also achieving cost "synergies". It expects Plush to reach an annualised gross profit margin of 59% before the end of FY23.
The acquisition of Plush expanded its store network by 46 stores – Nick Scali now has a combined store network of 108 stores. It has a long-term target of at least 85 Nick Scali stores and 90 to 100 Plush stores. A network of at least 175 stores would represent growth of more than 60%. I think this could be a big boost for the Nick Scali share price over time as it grows scale and, hopefully, profit.
In FY23, the business intends to open a minimum of two new Nick Scali stores and four new Plush stores.
It's also planning to own more of its retail stores. The company also recently bought a multi-purpose site in Townsville so it can relocate its showroom and provide a new distribution centre to support growth of both brands in regional Queensland.
Online sales growth could also lead to profit improvement for the business.
I think that Warren Buffett would like all of the above factors that could influence profit growth.
Aligned management
The current leader of the business is Anthony Scali, who is the company's managing director. He joined the business in 1982 and has almost 40 years of experience in furniture retailing. The company continues to be managed by the founding family.
Anthony Scali is also the biggest shareholder of the business — his ownership entity owns 11.04 million shares.
At the current Nick Scali share price, that means he holds $121.3 million of Nick Scali shares. He's very aligned with ordinary, smaller shareholders and he has a huge financial incentive to achieve attractive shareholder returns because he'd benefit as well.
Big dividend
Nick Scali typically pays a large amount of its profit out as a dividend. Indeed, it has a high dividend payout ratio.
The relatively low price/earnings (p/e) ratio also lends to Nick Scali having a large dividend yield.
According to the estimates on Commsec, at the current Nick Scali share price, it could pay a grossed-up dividend yield of 9.3% in FY23 and 8.4% in FY24.
Foolish takeaway
Putting all these elements together – lower price, growth plans, aligned management, and large yield – means the business could be pretty compelling to Warren Buffett in my opinion.
