The ASX dividend share Metcash Ltd (ASX: MTS) may provide a high level of passive income to investors in the coming years for two key reasons.
Now, Metcash may not be a household name, but the company supports many well-known food and drink retailers in Australia.
The ASX dividend share supplies IGA supermarkets around Australia and also supplies numerous Independent Brands Australia (IBA) liquor businesses including Cellarbrations, The Bottle-O, IGA Liquor and Porters Liquor. The IBA retail network has more than 1,800 'tier one' bannered stores across Australia and New Zealand.
Metcash also owns several hardware brands, including Mitre 10, Home Timber & Hardware, and Total Tools. It supports independent operators under the small-format convenience banners Thrifty-Link Hardware and True Value Hardware and a number of unbannered independent operators.
Due to its exposure to these industries, I think the ASX dividend share can generate fairly resilient profits. In addition, the company's dividend yield is expected to be high in the next few financial years. Let's investigate.
1. High dividend payout ratio
Every profitable company needs to decide its dividend policy. It can choose to pay a larger or smaller dividend than the previous year, simply pay out a particular percentage of its net profit after tax (NPAT) each year, or not pay a dividend at all.
Metcash's board of directors has decided on a healthy dividend payout ratio of 70% of underlying NPAT. I think that's high enough to deliver a pleasing dividend yield while still keeping some profit within the business to reinvest for more growth.
According to CMC Markets, Metcash is projected to pay a dividend per share of 21.9 cents in FY26. This translates into an expected grossed-up dividend yield of around 8.25%.
2. Low earnings multiple
A higher price/earnings (P/E) ratio can push down the yield, while a lower P/E ratio can lead to a higher dividend yield from an ASX dividend share.
Metcash usually trades on a relatively low P/E ratio compared to some of its peers.
The estimates on CMC Markets suggest the ASX dividend share could generate earnings per share (EPS) of 28.1 cents in FY24 and 30.4 cents in FY26. Those numbers would put the current Metcash share price at 13x FY24's estimated earnings and 12x FY26's estimated earnings.
These figures mean Metcash shares are much cheaper than some ASX blue chip stocks. For example, the Wesfarmers Ltd (ASX: WES) share price is valued at 30x FY24's estimated earnings and the Woolworths Group Ltd (ASX: WOW) share price is valued at 24x FY24's estimated earnings.
If Metcash can keep growing earnings over the longer term, then the valuation and dividend may appeal to investors.
