This ASX 200 stock gained in April while the market sank 3%. Is it a buy?

06/05/2024

Happy woman looking for groceries. as she watches the Coles share price and Woolworths share price on her phone

The S&P/ASX 200 Index (ASX: XJO) stock Metcash Ltd (ASX: MTS) beat the market in April 2024, rising by around 1% compared to a drop of 3% for the ASX 200. Is the company a buy? I’m going to talk about three reasons why I think it is.

Firstly, I’ll describe what this business does. It supplies IGA supermarkets around Australia, as well as independent liquor chains like Cellarbrations, The Bottle-O, IGA Liquor, and Porters Liquor.

It also has an increasingly important hardware segment that includes several businesses, including Mitre 10, Home Timber & Hardware, Total Tools, Bianco Construction Supplies, and Alpine Truss.

Now I’ll get into three reasons why I think the ASX 200 stock is attractive.

Low valuation

The Metcash share price has dropped around 20% from its peak in April 2022, so it’s a fair bit cheaper than it was before.

This has pushed the price/earnings (P/E) ratio lower, making the ASX 200 stock’s valuation more appealing. If we look at the estimate on Commsec, the company is projected to make earnings per share (EPS) of 29.5 cents. That would put the Metcash share at 13x FY25’s estimated earnings.

Compare that to Bunnings and Kmart owner Wesfarmers Ltd (ASX: WES), it’s trading at 28x FY25’s estimated earnings. Metcash is trading at less than half the forward earnings of Wesfarmers.

Big dividend yield

Part of the benefit of having a low earnings multiple is that the dividend yield can be relatively higher.

For example, if a business pays an annual dividend of $5 and it has a share price of $100, that’s a yield of 5%. If the share price were $150 instead, the yield would be 3.3%.

The company has set its dividend payout ratio at 70% of underlying net profit after tax (NPAT). That means the business is retaining 30% of its net profit to reinvest back into the business.

According to Commsec, the company is projected to pay an annual dividend per share of 21 cents in FY25, translating into a grossed-up dividend yield of 7.8%.

Dividends can reward patient investors as they hold the business. With the Metcash dividend yield being so high, investors can receive a sizeable return just from the passive income.

Long-term earnings growth

Commsec projections suggest the Metcash EPS can grow 7.8% between FY24’s projected profit to the figure for FY26.

One of the tailwinds for the ASX 200 stock is ongoing population growth â that means more mouths to feed and more homes needed, which is what Metcash’s food and hardware divisions can help with.

The company has made a few acquisitions in the last few years that can boost its earnings and deliver good organic growth.

For example, it recently announced the acquisition of Superior Food, a food supplier that services business customers like cafes, restaurants, hotels and hospitals.

It has owned Total Tools for a while now, but that business has delivered a solid amount of sales growth since the acquisition, despite the challenging operating conditions. Profit growth could mean good things for both the Metcash share price and dividend payments.

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Low valuation

Big dividend yield

Long-term earnings growth

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