Will Tesco plc and Rolls-Royce Holding plc ever be dividend champions again?

Tesco plc (LON: TSCO) and Rolls-Royce Holding plc (LON: RR) have both cut their dividends in recent years. Can either get back to dividend elite status?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Tesco (LSE: TSCO) and Rolls-Royce (LSE: RR) were once amongst the FTSE 100’s dividend elite. However, in recent years, both companies have fallen from grace in spectacular fashion. Can either stock become a dividend champion in the future? Here are my thoughts.

Tesco

It wasn’t long ago that Tesco was considered a ‘core holding’ for UK income investors. Looking back to 2011, the retailer had increased its dividend for 27 consecutive years, an impressive achievement. Furthermore, the yield was attractive, often just under the 4% mark.

However, the supermarket landscape changed dramatically several years ago when the German discounters began aggressively targeting market share. Profits at the big four traditional supermarkets nosedived dramatically. As a result, Tesco was forced to cut its payout.

The good news for income investors, is that it recently reinstated its dividend. Don’t get too excited just yet however as the payout wasn’t huge. Investors received a half-year payout of 1p per share on 24 November. Looking forward, City analysts forecast a full-year FY2018 payout of 3.28p, a yield of 1.6% at the current price.

For FY2019, analysts expect the dividend to increase to 5.19p. While that’s certainly a progression, it still only represents a yield of 2.6% at today’s share price. Slightly underwhelming in my view.

Will Tesco ever have a strong yield again? I’m not so sure. On the plus side, dividend coverage now looks quite looks healthy, indicating room for further growth. On the downside, the supermarket landscape is likely to remain extremely challenging. Lidl and Aldi are still growing at an incredible speed. All in all, I think there are better dividend stocks out there right now.

Rolls Royce

Like Tesco, it was only a few years ago that Rolls-Royce was considered to be a dividend star. Up to FY2014, the engineering specialist had recorded nine consecutive dividend rises, with the payout rising 180% over that period. However, in recent years, it’s been a different story. Rolls has cut its dividend by 29% per year over the last two years. Last year’s payout of 11.7p was a yield of just 1.4% at the current share price. Hard to retire early on that kind of payout.

So what does the future hold? Can the engine maker get back to dividend champion status?

Unfortunately, in the short-to-medium term, the outlook for income investors doesn’t look great. While the company stated in February that over the long term, its objective is to “progressively rebuild” its dividend to an “appropriate level,” it also said that this is subject to the short-term cash needs of the business.

And that’s the problem. Rolls just doesn’t have the cash resources to pay big dividend rights now. For example, for the first half of this year, free cash flow (operating cash after capital expenditure, pensions and taxes, before payments to shareholders) was -£339m. That’s clearly not ideal. Companies require cash to pay their shareholders dividends. It’s as simple as that.

Looking at broker estimates, Rolls is expected to pay dividends of 12.3p this year and 13.7p next year. Those payouts equate to yields of just 1.5% and 1.6%. Given the attractive yields on offer from many other FTSE 100 companies right now, those payouts don’t look attractive to me. Income investors should look elsewhere for large dividends, in my opinion.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »