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Tesco PLC Could Be Worth 423p

Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) continues to be one of the highest yielding companies listed on the FTSE 100.

Indeed, it is currently the 19th highest yielding stock on the FTSE 100, with it offering shareholders a yield of 4.3%.

Although this yield has fallen in the last six months or so, as Tesco has recovered from its midsummer blues, it remains a highly useful means to fight off the twin challenges of low bank account savings rates and persistent inflation. Furthermore, with savings rates seemingly unlikely to increase significantly in 2014 and inflation having the potential to go higher, Tesco could prove to be a boon for income-seeking investors over the next year.

While its yield is a touch lower than it was in the summer, Tesco’s dividend still beats the FTSE 100 index hands down. For instance, the FTSE 100 currently yields 3.5%, meaning Tesco offers a premium of 23% versus the wider index.

Were Tesco’s yield to equal the FTSE 100 yield of 3.5%, it would mean shares trading as high as 423p and, if shares did reach this level, it would equate to a capital gain of over 22% from its current share price.

Such gains, while impressive, would not be the whole story because investors would also continue to receive an inflation-busting yield of 4.3% to further boost total return.

Of course, such gains are unlikely to happen quickly: Tesco is still struggling to implement a successful strategy in the UK, while its excursions abroad have proven to be somewhat challenging in many cases. However, the potential for impressive returns clearly exists over the medium to long term.

In addition to offering considerable upside, Tesco remains financially sound, with the company having only a moderate amount of debt. This means that it should be well-positioned to withstand future interest rate rises and should not see profitability compromised by onerous interest payments.

Indeed, the debt to equity ratio currently stands at 65%, which seems to offer an optimal mixture of debt and equity so as to provide shareholders with an adequate return without taking on too much additional risk. Certainly, the repayment of debt should not compromise the company’s ability to pay future dividends, which is another reason why Tesco is a highly attractive income stock.

However, Tesco does not win the award for the Top Income Stock Of 2013. That accolade is bestowed upon a utility company which may or may not be included in your portfolio.

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> Both Peter and The Motley Fool own shares in Tesco.