Metcash Ltd (ASX: MTS) is an ASX dividend stock that has seen solid performance, better than Vanguard Australian Shares Index ETF (ASX: VAS). Its level of satisfactory performance could continue for a few reasons.
The VAS ETF follows the S&P/ASX 300 Index (ASX: XKO), which is an index of 300 of the largest businesses on the ASX.
Metcash is an Australian company that has three divisions – food, liquor and hardware.
The ASX dividend stock's food division is best known for supplying IGAs around Australia.
The liquor division supplies a wide range of liquor retailers around the country including Cellarbrations, The Bottle-O, IGA Liquor, Thirsty Camel, Big Bargain Bottleshop, Duncans and Porters Liquor.
The hardware business is involved in a number of areas. It owns the brands Mitre 10, Home Timber & Hardware and Total Tools.
Investment performance
The Metcash share price has delivered stronger returns than the VAS ETF unit price in the last few years.
If we look at the past five years, the Metcash share price has risen 36% (and 60% from 14 December 2018), while the VAS ETF unit price has only gone up by 21% over that same five-year period.
Of course, there's more to a return than just the capital growth. Dividends should be included to reach a total return.
In the last five years, according to CMC Markets, the Vanguard Australian Shares Index ETF has returned an average of 8.6% per year, while Metcash shares have delivered an average return per annum of 11.5%.
How big is the dividend yield?
An ETF simply passes through the dividends that it receives from its underlying investments. In this case, the VAS ETF owns shares like BHP Group Ltd (ASX: BHP), Commonwealth Bank of Australia (ASX: CBA) and CSL Limited (ASX: CSL).
Excluding the effect of franking credits, the VAS ETF dividend yield is 4.2% according to Vanguard.
The trailing dividend yield of Metcash is 6%, excluding franking credits, so the ASX dividend stock has a better yield.
If we add in the franking credits, Metcash's dividend yield becomes even more attractive than VAS ETF because it is fully franked, whereas the VAS ETF distribution isn't fully franked because it receives some unfranked income.
What could happen next?
My crystal ball isn't working at the moment, so I don't know what's going to happen with the ASX dividend stock.
It's difficult to predict what will happen with the Vanguard ETF because that's most of the ASX share market, in market capitalisation terms. Hopefully it can rise.
I like the outlook for Metcash, it's the sort of business that can benefit from Australia's growing population thanks to more mouths to feed (via IGA supermarkets) and more homes to build.
Metcash has just announced it is taking its ownership of Total Tools to 100%, which is useful because of the profit growth that it is delivering for Metcash.
In the first 18 weeks of FY24, Metcash said that total sales had increased by 1.7%, with demand and sales continuing to be at "solid levels" with all pillars "delivering sales growth".
The company's total hardware sales had increased 3.2%, which is very positive considering this is the most profitable division and it has grown sales faster than the overall business.
There are further earnings drivers like a growing store network, upgrades at existing stores, an improved supply chain and possible growth of its digital sales that could help profit.
What is the ASX dividend stock's valuation?
According to the projection on Commsec, the Metcash share price is valued at 12 times FY24's estimated earnings.
