Some former top ASX dividend shares could be trading at a good value to deliver market-leading returns from here.
I like to be able to buy businesses that pay dividends at lower prices because it boosts the dividend yield. However, I'd only invest in a business if I thought its earnings could grow over the longer term.
Higher earnings can translate into a rising share price and bigger dividend payments.
Baby Bunting Group Ltd (ASX: BBN)
Baby Bunting is one of the leading retailers of baby and toddler products. It sells a variety of things like prams, car seats, furniture, toys, blankets and so on.
The Baby Bunting share price is down by around 45% over the past year. It faced difficulties with its profit margins in the first half of FY23. The company has spent money on establishing its New Zealand business and opening new stores while also targeting efficiency improvements.
A growing store network and New Zealand expansion may enable Baby Bunting to keep growing earnings in the years ahead. It expects to open a total of eight stores in FY23. It has a long-term target of 120 stores in Australia and New Zealand.
Commsec estimates put the current Baby Bunting share price at 16x FY23's estimated earnings with a grossed-up dividend yield of 6.1%. Looking ahead to the early FY25 projections, the ASX retail share is valued at 11x FY25's estimated earnings with a possible 8.9% grossed-up dividend yield.
Challenger Group Ltd (ASX: CGF)
Challenger is the largest annuity provider in Australia. An annuity is where a customer can turn their capital into a source of regular income over a set period or the rest of their life.
I don't think the previous record low interest rate environment benefited Challenger. A higher interest rate appears to be better for the business as it delivers better returns for customers.
After all, a retiree is more likely to want an annuity with an interest return of more than 4%, for example, than the lower rate being offered in mid-2021.
This is reflected in results from the first quarter of FY23, where annuity sales increased by 50% to $1.8 billion.
Challenger recently explained at its annual general meeting (AGM) some of the tailwinds it is benefiting from:
Successive governments have implemented significant regulatory reforms across the financial services sector, such as the Retirement Income Covenant. These reforms are expected to provide retirees with the confidence of a secure retirement and have also created tailwinds for our business.
We have reached an exciting point in Australia's retirement system with a definitive shift in industry focus towards the decumulation phase. And Challenger – as Australia's leading retirement income brand – is well positioned to benefit.
Our unique competitive advantages combined with supportive long-term tailwinds see us well-placed to capture opportunities and drive strong business growth. We are leaders and innovators in our respective markets – with a broad offering and strong distribution footprint.
Australia's world-class superannuation system continues to grow rapidly. Assets are set to triple over the next 20 years.
Using the Commsec estimates, the Challenger share price is valued at under 17x FY23's estimated earnings. This, with a grossed-up dividend yield of 4.8%.
