After depriving its shareholders of a dividend for the last two years, Tesco (LON: TSCO) (TSCO.L) announced this morning in its half-year results that it will be resuming dividend payments this year. The UK’s largest supermarket will pay a 1p interim dividend on the 24th November 2017 to shareholders that are on the register at the close of business on the 13th October. Does that mean Tesco has the potential to once again become a core dividend holding for UK investors? I’m not convinced. Here’s why.
Don’t get me wrong, today’s results show that Tesco is certainly heading in the right direction, after a tough few years.
For the first half of the year, group sales increased 3.3% or 0.7% in constant currency, and pre-exceptional diluted earnings per share rose an impressive 71% to 5.46p. Debt was reduced by 25%.
Most importantly for income-deprived Tesco shareholders, the company announced that it will be paying an interim dividend of 1p. Chief Executive Dave Lewis stated:
“We are continuing to make strong progress. Sales are up, profits are up, cash generation continues to strengthen and net debt levels are less than half what they were when we started our turnaround three years ago. Today’s announcement that we are resuming our dividend reflects our confidence that we can build on our strong performance to date and in doing so, create long-term, sustainable value for all of our stakeholders.”
This all looks positive. However, there’s several reasons I won’t be buying Tesco for its dividend just yet.
Low dividend yield
In the ‘dividend’ section of today’s results, Tesco has said that it anticipates a “one-third, two-thirds split between the interim and the final dividend.”
This suggests to me, that the full-year payout will be somewhere around the 3p mark. At the current share price of 188p, that equates to a yield of just 1.6%. Nothing to get excited about.
Looking forward, City analysts forecast a payment of 5.3p next year. While that’s an improvement, it’s still only a dividend yield of 2.8%, which is below my rough minimum threshold of around 3.5%.
I’m also hesitant to invest in the UK supermarkets right now, because I believe the supermarket landscape is likely to remain intensely competitive going forward.
Lidl and Aldi have grabbed significant market share over the last four years, and this trend shows no sign of slowing down. For example, for the 12 weeks to the 13th August, Lidl and Aldi grew their sales by 18.9% and 17.2% respectively, while Tesco managed just 3.0% growth, according to Kantar Worldpanel. Aldi this year overtook Co-Op to become the UK’s 5th largest supermarket, and both discounters have significant plans to keep growing.
Adding together the competitive landscape and the low dividend yield, I don’t see a great deal of appeal in Tesco as a dividend stock right now. There are plenty of better FTSE 100 dividend stocks out there, in my view.
Disclosure: Edward Sheldon, CFA has no position in Tesco.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.