This ASX dividend share is projected to pay a 14% yield by 2025

Dividends could return strongly for this stock.

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ASX dividend share Adairs Ltd (ASX: ADH) is projected to pay a huge dividend yield by 2025. The short term may be rough for the company's financials, but the longer term looks more promising.

This business sells products to customers through three brands – Adairs, Focus on Furniture and Mocka.

The Adairs share price has dropped by 34% since the beginning of the year and it's down over 60% from the end of 2021, as we can see on the chart below.

Recent trading

Adairs shares have suffered so much because investors are worried about what might happen in the coming period after all of the inflation and interest rate rises.

The start of FY24 wasn't wonderful for the ASX dividend share, with group sales down 8.9% in the first seven weeks.

The company said that the near-term outlook is likely to remain challenging because of the current economic conditions.

To tackle this, management has implemented "material" cost reduction initiatives that aim to manage the business appropriately while preserving a "strong service culture".

The company said that margins have been "carefully managed" in early FY24 despite the weaker trading environment, with the group margin "ahead" of FY23.

Adairs dividend yield expectations

The company decided not to pay a final dividend for FY23, which may have disappointed shareholders. That was because of the capital requirements required to take over the operations of its national distribution centre and the importance of maintaining a strong balance sheet.

While the business may not pay much of a dividend in FY24, it could recover significantly in FY25.

The estimate on Commsec suggests that owners of Adairs shares could get an annual dividend per share of 15 cents. That would translate into a fully franked dividend yield of 10% in FY25, or 14.3% when grossed up for franking credits.

This dividend is based on an expectation that the ASX dividend share will generate 21.8 cents of earnings per share (EPS) in FY25. If it does generate that much profit, it would represent a dividend payout ratio of 68.8% and a forward price/earnings (P/E) ratio of just under 7.

Can profit improve?

Adairs can't control the external operating environment, but it can do a few things.

First, it has taken control of its national distribution centre to improve the customer online experience, improve in-store stock availability and reduce operating costs by at least $4 million each year.

The ASX dividend share can open stores in new locations and upsize existing locations, which makes them more profitable.

Adairs can sell Mocka products in stores, which would create good synergies between its brands.

It can also grow the number of paid members that it has, called linen lovers. I think Australia's rapidly growing population can help with both member numbers and overall financial performance.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Adairs. The Motley Fool Australia has positions in and has recommended Adairs. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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