While I'm predominantly a 'growth' investor through and through, I still have a place in my portfolio for passive income. My preference is to use the proceeds from ASX dividend shares to fund more investments. This, in a way, grows my portfolio for free.
Despite plummeting nearly 25% in under two months, this ASX 200 company could be throwing out cash for years to come.
Solid foundations overlooked
Shares in one of Australia's largest agribusiness operators, Elders Ltd (ASX: ELD), have been crucified since the CEO Mark Allison announced his retirement on 14 November. In a single trading day, the Elders share price tumbled more than 20%.
The sudden concern is somewhat understandable, with Allison steering the Elders ship out of dangerous waters from 2013 onward. Over the following decade, the highly experienced agricultural manager created enormous shareholder value, demonstrated by the share price performance during this time.
However, I think some investors might be overlooking what Allison and the team have built. The balance sheet has been repaired, the operations have been refocused, and the company has expanded.
While all of this can still be undone by poor leadership, the newly appointed CEO will be inheriting a well-positioned business.
Why more dividends could be on the way
According to Elders' FY22 full-year presentation, around 60% of the company's gross margin is reliant on three areas of the business, those being:
- AgChem (26.5% of gross margin)
- Agency services (22.5% of gross margin); and
- Wholesale products (11.2% of gross margin)
Reassuringly, Rural Bank is forecasting most areas of the Australian agricultural industry to hold steady in 2023. Cattle, cropping, horticulture, dairy, and sheep are all expected to remain above historical averages, despite some weakening in demand.
This is good — if it turns out to be the case — for Elders shareholders, as its key divisions should continue to perform reasonably well. If so, the income could continue from this ASX dividend-paying share.
The team at Goldman Sachs is also optimistic about Elders' future prospects. Analysts are forecasting 53 cents per share fully franked in FY23 and 57 cents in FY24.
Why I think this ASX dividend share is cheap
Earnings for agricultural companies can be volatile due to the changing seasons. That's why it comes as no surprise that investors aren't often willing to pay a large premium for such businesses.
However, at a price-to-earnings (P/E) ratio of around 9.7 times, the Elders share price is trading at a 32% discount to the industry average. Furthermore, the relatively conservative debt-to-equity of 21% gives me confidence Elders will continue to consolidate the industry.
I already hold a small position in Elders, but the recent pullback makes it a hot target for me to double down on in 2023.
