With a 12% yield, I think this potentially undervalued ASX dividend stock is amazing

This stock has been very rewarding when it comes to dividends.

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The ASX dividend stock Shaver Shop Group Ltd (ASX: SSG) has been paying investors a huge dividend yield. It's predicted to keep doing so, which is one of the reasons I think it's undervalued.

This business is a specialist retailer of hair removal products for men and women. A number of the products that it sells are exclusive, which is useful for encouraging customers to come to Shaver Shop.

Huge dividend yield expected

The business trades on a low price/earnings (P/E) ratio, which helps it have a large dividend yield (combined with a generous dividend payout ratio).

It has grown its dividend per share each year since 2017 when it first started paying cash to shareholders.

In FY23 it paid an annual dividend per share of 10.2 cents, which translates into a grossed-up dividend yield of 12.1%.

The estimate on Commsec suggests the business could pay an annual dividend per share of 10.3 cents in FY24 and 10.4 cents in FY25. The FY24 – this year's – grossed-up dividend yield could be 12.25% and FY25 could see a grossed-up dividend yield of 10.4%.

Looking further ahead, the FY26 grossed-up dividend yield is forecast to be 13%, but that's quite a long way away.

Remember, these are all just forecasts. The level of the dividend is dictated by the profit generation of the ASX dividend stock and the board of directors' discretion.

How cheap is the ASX dividend stock?

Shaver Shop's earnings per share (EPS) are expected to fall in FY24, but it may only drop to 11.9 cents. That means Shaver Shop is valued at 10 times FY24's estimated earnings.

I'd say that's a very low P/E ratio considering this year may be the low point of Shaver Shop's earnings during this earnings cycle.

A business with a good earnings growth outlook should arguably trade on a higher P/E ratio because the valuation is meant to take into account longer-term profit generation potential, not just the current financial year. That's why ASX growth shares normally trade on a higher earnings multiple than large ASX blue-chip shares that have limited long-term growth potential.

It's projected to grow EPS by 6.7% to 12.7 cents in FY25 and then rise another 7.9% in FY26 to 13.7 cents. Those are forward P/E ratios of 9.4 and 8.75, which look really undervalued to me.

I don't know precisely what the earnings will be in the next few years, no one does, but there are a number of factors that I think can help Shaver Shop's earnings continue to climb higher.

It can keep opening new stores across Australia and New Zealand, it can grow online sales, it can expand further in other beauty and wellness categories (such as oral care) and it could deliver higher profit margins on a greater scale.

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 no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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