The ASX dividend stock Metcash Ltd (ASX: MTS) has fallen around 33% since its 2020s peak in April 2022. That's a large fall for a business that has a solid market position in several areas.
Metcash may not be the most recognisable name for investors, but it provides products to several well-known retailers. Metcash has multiple divisions, including food, liquor, and hardware.
The food division supplies IGA supermarkets around Australia. It also has a business-to-business company called Superior Foods that supplies customers such as restaurants, hotels, cafes, and so on.
Metcash's liquor division supplies several independent liquor retailers, including Cellarbrations, The Bottle-O, IGA Liquor, and Porters Liquor.
It also has a hardware business which includes Mitre 10, Home Hardware, Total Tools, Alpine Truss, Bianco Construction Supplies and others.
Let's look at how big the near-term dividends could be and why the ASX dividend stock could be a good buy today.
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Big payouts expected
In each operating period, the business generates a certain profit and cash flow from its operating activities.
With that profit, it aims to strengthen its business with investments, maintain a strong balance sheet and provide a payout of a dividend payout ratio of 70% of underlying net profit after tax (NPAT).
The business isn't currently generating as much profit as it did two or three years ago.
The broker UBS estimates that Metcash could pay an annual dividend per share of 17 cents in FY25, 19 cents in FY26, and 20 cents in FY27. At the current Metcash share price, that translates into forward grossed-up dividend yields of 7.7%, 8.6%, and 9.1%, respectively, including franking credits.
With the food division's defensive earnings, I think the company's profit and dividend are unlikely to fall much further than where the business is currently.
Why this could be a good time to invest in the ASX dividend stock
The market has been anticipating an RBA interest rate cut for some time, which finally happened last month. While I'm not expecting one rate cut to suddenly bring back boom-time earnings for the ASX dividend stock's hardware earnings, it could help boost confidence in the construction sector and add to demand.
Broker UBS thinks Metcash's profit could grow each year between FY26 to FY29. UBS suggests the ASX dividend stock's net profit could increase by 27% between the projected net profit figure for FY25 (of $276 million) and for FY29 (of $351 million).
I don't think the February 2025 rate cut will be the last one we see this decade, so further reductions could be beneficial, in my view, for both the company's profit and what price/earnings (P/E) ratio investors are willing to pay.
