The ASX dividend stock Spark New Zealand Ltd (ASX: SPK) has sunk 47% in the last year, as the chart below shows. Not many ASX shares have fallen as much as that in the past 12 months. The big decline may have opened up a good buying opportunity.
This company may not be familiar to Aussies because most of its operations are in New Zealand. It's the largest telecommunications company in New Zealand and serves a wide range of customers, including households, small businesses, not-for-profit organisations, government entities and large enterprise clients.
Spark offers services in mobile and broadband, entertainment, cloud services, AI, the Internet of Things, and 5G.
ASX investors may already own a defensive telco stock like Telstra Group Ltd (ASX: TLS) in their portfolio. But, after a big valuation decline, Spark shares could be an appealing addition to a dividend-focused portfolio.
How big is the ASX dividend stock's yield?
The Spark share price has declined due to profit headwinds amid higher inflation and elevated interest rates. The company recently reduced its dividend guidance for FY25 from 27.5 cents per share to 25 cents per share.
At the current valuation, that implies Spark could pay Aussie shareholders a dividend yield of approximately 8.75%.
This compares to Telstra's fully franked dividend yield of 4.5% and a grossed-up dividend yield of 6.5%, including franking credits. In other words, Spark's yield is guided to be much larger than Telstra's current yield.
Why is the payout so large?
When a share price drops, it increases the dividend yield available. For example, if a business had a 6% dividend yield and its share price dropped 10%, the dividend yield would become 6.6%. If it fell 20%, the yield would become 7.2%, and so on.
As Spark's share price has declined heavily (more than 40%), it has really boosted the dividend yield.
While the company has reduced its FY25 dividend guidance a little, that was probably the prudent thing to do. Shareholders are still expected to receive a good payout because of that lower valuation and the company's continuing commitment to a generous dividend payout ratio.
Why I think the ASX dividend stock is a buy
Its profit has been impacted by a number of headwinds such as weak economic activity in New Zealand, increased cost of debt and higher depreciation charges due to increased capital expenditures.
While I'm not expecting a huge recovery this year, I believe the tide could start to turn. For starters, New Zealand's central bank has reduced the official interest rate materially, which could have a helpful medium-term impact on the country's economy (and Spark).
The ASX dividend stock is working hard to improve its cost profile through automation and simplification, which would also help efficiencies.
Another long-term benefit for the company could be the growth of data demand. As New Zealand's biggest telco, it will play an important part in the country's ongoing adoption of digitalisation.
Over the next five years, I believe the business will be able to deliver a solid amount of passive income and, hopefully, a share price recovery.
