ASX dividend share Nick Scali Limited (ASX: NCK) has fallen hard this year and in recent times. The company's share price is down 20% from early February 2023 and it's fallen almost 40% from November 2021.
A business isn't necessarily good value just because its share price falls. But when a cyclical company has seen a drop in share price, it could present an interesting opportunity, particularly for dividend-focused investors.
When a share price falls, it boosts a company's prospective dividend yield. So let's have a look at what the dividends could be for the next few years.
Dividend projections
In FY23, Nick Scali is expected to pay an annual dividend per share of approximately 67 cents per share (according to Commsec) though it has already paid the interim dividend for FY23. So, investors can still get a portion of the FY23 grossed-up dividend yield of 9.6%.
Then, with all of the impacts of inflation and higher interest rates, the earnings and dividend are expected to drop in FY24. In the current financial year, the grossed-up dividend yield could be 7.1%.
In FY25, there could be the start of a recovery, according to projections. The dividend per share could rise to 87.9 cents per share. This would be a grossed-up dividend yield of almost 8%.
Should investors worry about the ASX dividend share's potential profit fall?
It's difficult to say how far Nick Scali's profit will fall but at the moment, the projection is that profit is expected to drop by around 40% in FY24. That's not surprising – many chairs and couches were purchased during the COVID-19 period and households now have less money to spend.
Forecasts can change but as it stands, Nick Scali shares are valued at under 13x FY24's estimated earnings and at 11x FY25's estimated earnings.
These are not excessive price/earnings (p/e) ratios in my opinion, and this valuation is at a time of earnings decline.
The business can support its sales and operating leverage in a few different ways. It's planning to open more stores in Australia and New Zealand for both Plush and Nick Scali. At the end of the FY23 first half, it had a total of 107 stores and in the long term, it wants to grow this number to between 176 to 186 stores.
Online sales growth could also be helpful in the longer term. In the first six months, it made $14.1 million of revenue, a 'contribution to profit' of $8.1 million, which is a relatively high margin.
The ASX dividend share could also support its earnings by offering new products and ranges.
On a three-year view, I think Nick Scali shares could offer good dividends and an earnings recovery which could push its share price higher.
