The pain of higher interest rates is being felt by some parts of the ASX, including in the ASX retail space. There are a few dividend income beasts that could suffer as a result, but I believe they will bounce back as strong as ever.
If debt costs more, households are going to have less money to spend on items like TVs, fridges, electronics and furniture. But, I'm not expecting weak household demand to be the situation forever.
It's not surprising to me that investors have pushed down the share prices of some of the ASX's retailers. I'm going to tell you why I still like them right now, and why they're even more attractive if they fall further.
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JB Hi-Fi Limited (ASX: JBH)
JB Hi-Fi is one of the country's largest retailers of smartphones, TVs, appliances and other products through its JB Hi-Fi and The Good Guys stores.
As we can see on the chart below, the JB Hi-Fi share price is down more than 13% from January 2023 and over 20% from March 2022.
Last month, the ASX share reported that in the FY23 third quarter JB Hi-Fi Australia sales were up 0.8% and The Good Guys sales were down 3.8%. But, the sales numbers still represented strong growth compared to pre-COVID numbers of FY19.
While I don't think it is going to report sales growth in FY24, I believe its sales could be more resilient than what some investors are giving it credit for because of how essential people view their smartphones and computer these days for work, education, entertainment and communication.
The business thinks it has four key areas of competitive advantages – scale, a low-cost operating model, multichannel capability, and people and culture. I think these advantages will become stronger as it grows its market share and expands its store networks.
The dividend income beast has grown its dividend every year since 2013. After a tricky FY24, I think the business could get back to dividend growth.
According to Commsec, the JB Hi-Fi share price is valued at 12 times FY25's estimated earnings with a possible grossed-up dividend yield of 8%.
Nick Scali Limited (ASX: NCK)
Nick Scali is one of Australia's larger furniture retailers with its Nick Scali and Plush brands. As we can see on the chart below, the ASX share has dropped 33% from early February 2023, and it's down around 50% from November 2021.
Sales and earnings continued to perform strongly in the first half of FY23, with revenue up 57.4% and net profit after tax (NPAT) growth of 70.2%. But, in January 2023, Nick Scali brand written sales orders were 12.1% below January 2022.
The business can grow earnings through a mixture of expanding its product range, growing its profitable online sales, and increasing its store numbers over time. It was expecting to open four new stores in the second half of FY23.
I think shopper confidence will return in the longer term, and I believe the business can rebound in FY25.
According to Commsec, the dividend income beast might be valued at just 9 times FY25's estimated earnings with a grossed-up dividend yield of 9.4%. It had grown its dividend every year since 2013.
