I'm a fan of finding undervalued ASX dividend shares that have been sold down and offer a potentially large dividend yield. I'm going to talk about three S&P/ASX 300 Index (ASX: XKO) shares that are materially down from their highs.
One of the benefits of a lower share price is that when a share price falls, it boosts the dividend yield of the future dividend payments. For example, if a business with a 6% dividend yield falls 10%, the yield would become 6.6%.
With that in mind, below are three beaten-up names I'm looking at.
APA Group (ASX: APA)
APA is the owner and operator of a large gas pipeline in Australia – it carries half of the nation's natural gas usage. The business also owns or has stakes in a number of other energy assets including renewable energy generation, electricity transmission, gas storage, gas processing and gas-powered energy generation.
The APA share price is down around 30% from August 2022, despite the business continuing to grow its distribution and having most of its organic revenue (growth) linked to inflation.
It has grown its annual distribution each year since 2004. The ASX 300 share is expecting to pay a distribution per security of 56 cents in the current financial year, which translates into a FY24 yield of 6.7%.
Metcash Ltd (ASX: MTS)
Metcash supplies a number of independent food and liquor retailers including IGA, Cellarbrations, The Bottle-O, IGA Liquor, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop and Duncans.
The most attractive part of the business, in my eyes, is the hardware division, which includes Mitre 10, Home Hardware and Total Tools. It also recently announced the planned acquisition of Bianco Construction Supplies (a SA and NT business) and Alpine Trust (a large frame and truss operator).
In my opinion, the ASX 300 share has a compelling future in hardware, with Australia's ongoing population growth and the likely ongoing need for construction for the years ahead.
I like the company's plans to move into foodservice distribution, with the acquisition of Superior Food. It's a large market, with potential for Metcash to grow its market share. This is a logical expansion of its existing food business.
The company has a dividend payout ratio of 70% of underlying net profit after tax (NPAT). The projection on Commsec suggests a grossed-up dividend yield of 7.4%.
Adairs Ltd (ASX: ADH)
Adairs is an ASX 300 share that operates through three different businesses – Adairs, Mocka and Focus on Furniture.
Sales and foot traffic are down amid the high cost of living, which is also hurting profitability. The company is looking to upsize its Adairs stores and roll out additional stores to boost its network's earning power. It has recently taken over operation of its new national distribution centre, which will hopefully lead to lower costs and better efficiencies.
However, I don't think the weak retail conditions will last forever, particularly if interest rates start coming down. The Adairs share price is down around 50% from mid-2021, which makes the future dividend payments compelling.
According to Commsec, the grossed-up dividend yield for FY25 could be around 8% and in FY26 it could be 11%.
