1 ASX dividend stock down 30% to buy right now

Can this stock pipe in good returns?

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The ASX dividend stock APA Group (ASX: APA) has experienced significant pain in the last couple of years. As the chart below shows, the APA share price is down 30% from its peak in mid-2022.  

When a passive income-paying business drops in value, it can unlock a much higher level of dividends for prospective investors.

For example, if a business with a 4% dividend yield suffers a 10% share price drop then yield becomes 4.4%, a fall of 20% becomes 4.8% and so on. APA has suffered an even greater decline.

There are two key reasons why APA shares look like a compelling pick to me.

Excellent asset base in high demand

APA is one of the largest owners of energy assets in Australia and as energy is essential in the Australian economy, I'd suggest it provides defensive earnings.

Its gas infrastructure includes more than 15,000km of transmission pipeline, 12,000 tonnes of LNG and 18 PJ of gas storage, and 29,500km of gas mains and pipelines to more than 1.5 million gas customers. It transports more than half of the nation's usage.

The ASX dividend stock owns a significant amount of power generation, including 342MW of wind, 311MW of solar, 39MW of battery energy storage and 884MW of gas-fired generation.

Electricity transmission is the final asset group for APA – it has more than 800km of high-voltage electricity transmission and 290km of deep-sea electricity cables.

APA continues to invest in these three areas — gas transmission, renewable energy generation, and electricity transmission — unlocking further cash flow.

The Australian federal government has recently confirmed gas is expected to play a part in Australia's energy mix to 2050 and beyond, which highlights the importance of APA's gas asset, in my opinion.

Another reason to be bullish about long-term energy demand is that new data centres may require significantly more energy in the coming years.

The ASX dividend stock's excellent record

APA has grown its distribution every year over the past two decades. Growth is not guaranteed, but APA has delivered the right balance with its cash flow between rewarding shareholders and investing for growth.

The company's growing cash flow is funding the growing payments. Pleasingly, APA says that over 90% of its revenue is linked to inflation. APA's revenue has grown during this inflationary period, and with inflation continuing to remain high, its shorter-term revenue outlook is promising.

APA expects to grow its FY24 annual distribution by 1.8% to 56 cents, which is a forward distribution yield of 6.8%. I think that's a very pleasing starting yield from the ASX dividend stock, with a high chance of further growth in the foreseeable future.  

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 positions in and has recommended Apa Group. 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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