Owners of Zip Co Ltd (ASX: ZIP) shares have seen enormous capital growth in the last year, up by more than 880%. But, there could be an additional form of returns on the horizon: dividends.
As the chart above shows, the ASX buy now, pay later share has been an incredible performer.
However, if an investor currently wants to capitalise on the expansion of Zip's profitability, a shareholder would need to sell shares. Not everyone may want to lighten their holding.
But, one expert believes dividends could start flowing in the next few years.
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Passive income prediction
The broker UBS was impressed by the company's recent FY25 first-quarter update, particularly with Zip's US operations, which it called a "star performer".
UBS believes that Zip's operating profit (cash EBTDA) margin is expected to continue rising as cost control remains a "key focus". This is despite the likely step-up of US brand marketing and advertising in Australia to promote ZipPlus and a "likely increase in bad debts expense to drive growth".
The broker is expecting Zip's net profit after tax to hit $45 million in FY25 and continue rising in the subsequent years.
UBS is currently forecasting that Zip's bottom line could reach $128 million in FY26, rising to $195 million in FY27, climb again to $247 million in FY28 and finally rise to $286 million in FY29.
If Zip is able to hit those profit forecasts, then UBS is predicting that the ASX buy now, pay later share could start paying a dividend to shareholders. A dividend is paid from profits generated, so Zip needs to make a profit first before it can start paying dividends.
In FY28, Zip is projected to make earnings per share (EPS) of 19 cents and pay a dividend per share of 9 cents.
Then, in FY29, UBS is forecasting Zip could make EPS of 22 cents and pay an annual dividend per share of 9 cents.
Excluding possible franking credits, the dividend forecast implies Zip could pay a dividend yield of around 3%.
Recent financial performance
Let's remind ourselves what the company told the market.
While ongoing financial growth is not guaranteed, the business' latest quarterly update was promising.
Zip reported that in the three months to 30 September 2024, revenue jumped 18.8% to $239.9 million, cash EBTDA soared 233.7% to $31.7 million, and the cash transaction margin improved to 3.9%, up from 3.6% in the prior corresponding period.
If Zip's profitability continues improving, then it could be on track to pay the forecast dividends.
