S&P/ASX 300 Index (ASX: XKO) dividend share Adairs Ltd (ASX: ADH) paid enormous dividends during the COVID-19 period. There may be dividend weakness in the short term because of a difficult economic situation for households, but stronger payouts are possible in the years ahead.
The Adairs share price has dropped significantly over the last couple of years. It's down 65% from June 2021 and has fallen 41% in the past year.
I think one of the underappreciated things about a fallen ASX dividend share is that the lower share price translates into a much higher dividend yield in the future.
For example, imagine a business has a dividend yield of 7%, and then it falls 10%. This turns the dividend yield into 7.7%. A 50% fall would translate into a grossed-up dividend yield of 10.5% for that same business.
What's going on with the Adairs share price?
Adairs is suffering from a loss of investor confidence about its profitability amid high inflation and less discretionary spending.
At the AGM, the home furnishings retailer revealed its sales in the first 21 weeks of FY24 were down 9%. Higher interest rates and cost of living pressures saw a decline in customer traffic across each business arm of around 10%.
Adairs said the outlook for the rest of FY24 was "expected to remain challenging given prevailing macroeconomic headwinds", adding the business was being "managed accordingly".
Huge projected dividend yield
Those difficulties may see Adairs only pay a dividend per share of 4 cents per share in FY24, according to the forecast on Commsec.
But, by 2026, better economic conditions may see a rebound in company profit and dividend payout. The forecast is that Adairs could pay an annual dividend per share of 19.4 cents in FY26.
At the current Adairs share price, that translates into a grossed-up dividend yield of 16.7%, or 12% if we exclude the effect of franking credits. It's priced at 6x FY26's estimated earnings.
This is just an estimate, of course. The actual dividend may be smaller (or larger) than expected.
Can the ASX 300 dividend share's profit recover?
Adairs may benefit strongly when retail conditions recover, but it's also doing a few specific things to try to grow profit.
For example, it's opening larger store formats that achieve "superior economics" and support category expansion. The ASX retail share is also using artificial intelligence to improve the customer experience and team productivity.
The company plans to roll out numerous Focus on Furniture stores around the country, while Mocka is planning a physical presence for its products. Physical locations are being evaluated.
