The S&P/ASX 200 Index (ASX: XJO) dividend stock Metcash Ltd (ASX: MTS) has dropped by around 25% since April 2022, as shown on the chart below.
The business is facing challenging conditions at the moment, with the hardware division (Total Tools, Home Timber & Hardware, Mitre 10, etc.) hurting due to headwinds facing the construction sector and some households struggling in the high cost-of-living environment.
The food and liquor divisions of Metcash, which supply independent retailers such as IGAs nationally, are also not seeing much strong growth right now.
However, sometimes, times of weakness can provide the best buying opportunities, particularly for ASX 200 dividend stocks.
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Better dividend yield
When a share price falls, it pushes up the prospective dividend yield.
For example, if a business' dividend yield starts at 6% and the share price drops 10%, then the dividend yield becomes 6.6%. If the share price drops 20%, the dividend yield becomes 7.2%, and so on.
With the Metcash share price down 25% over the past two or so years, the prospective dividend yield from the ASX 200 dividend stock is significantly higher.
We shouldn't invest in a stock simply because it's down. However, if there was ever a good opportunity to invest in this business, I believe it's now due to the weakness in the hardware division.
Generous dividend payout ratio
One of the main metrics that decide the dividend yield is the dividend payout ratio – this is how much of the annual profit generated is paid to investors.
The higher the payout ratio, the bigger the cash returns will be for shareholders. But, higher payouts reduce the strength of the balance sheet and reduce how much cash the business can reinvest into the business.
Metcash has committed to a dividend payout ratio of 70% of underlying net profit after tax (NPAT).
According to the forecast on Commsec, Metcash is projected to pay an annual dividend per share of 20 cents in FY25, translating into a grossed-up dividend yield of around 8%.
Cheap valuation
I believe the Metcash share price is very reasonable, making the ASX 200 dividend stock look good value to me.
Using profit estimates from the broker UBS, Metcash is valued at around 13x FY25's estimated earnings.
One of the most important elements to me when investing in a stock with a low price-earnings (P/E) ratio like this is the prospect of growing earnings.
UBS forecasts the business could make $295 million in NPAT in FY25, $318 million in FY26, $348 million in FY27, $369 million in FY28, and $388 million in FY29.
While those are just forecasts, it's a promising sign that net profit could rise by around 30% between FY25 and FY29 while paying a large dividend.
