S&P/ASX 200 Index (ASX: XJO) stock Lovisa Holdings Ltd (ASX: LOV) has already delivered considerable passive income growth for shareholders over the years. And there could be a lot more growth to come.
Affordable jewellery may not strike investors as the most growth-oriented industry, but the fact Lovisa's scale is increasing so rapidly gives it strong compounding potential.
Scaling up is significantly profitable
The ASX retail share sells jewellery at a fairly high margin. In the FY23 half-year result, the company had a gross profit margin of 80%, up from 78% in the prior corresponding period.
Lovisa reported that its HY23 revenue was up by 44.8%, while net profit after tax (NPAT) grew by 31.9%. That's despite all the investing the business is doing to increase its scale. It's such profit growth that can fund continued passive income growth.
The ASX 200 stock has significantly grown its store numbers. In HY22, it had 586 stores and by HY23, it had 715 stores globally.
There's also a lot of scope for the company to keep growing. In Australia, which has less than 30 million people, it had 163 stores, but in the US, where there are more than 330 million people, it had 155 stores.
Lovisa has only just entered a number of markets including Canada, Mexico, Italy, Poland, South America, and Hong King. Mainland China and India are two very promising future markets.
In the long term, the business could quite comfortably create a network four or five times bigger than it has today, in my opinion.
Passive income growth potential
Lovisa's dividend growth is not guaranteed, particularly in the short term. In the HY23 result, it grew its interim dividend by 2.7% to 38 cents per share.
Commsec estimates suggest the annual dividend per share from Lovisa could be 88.5 cents per share in FY25.
That would imply growth in the annual dividend of close to 20% to FY25, compared to the last 12 months. That's much better than ASX 200 shares like BHP Group Ltd (ASX: BHP) and Woodside Energy Group Ltd (ASX: WDS) which could see their dividend payments lower in FY25, according to Commsec.
One of the wonderful things about the dividend projections for Lovisa is that the dividend payout ratio (from profit) is expected to decrease. In fact, profit is expected to grow even faster and the company could re-invest more of that profit into the further growth of its store network.
Indeed, businesses don't need to take on debt or issue more shares to fund growth. They can do it just by reinvesting their profit. Certainly, these are the sorts of businesses that can deliver the most value to shareholders.
By the time we get to FY30, I think Lovisa could be one of the best-performing companies from the current group of ASX 200 shares, largely because of its store rollout potential.
