Is Tesco PLC A Safe Dividend Investment?

Not all dividends are as safe as they seem. What about Tesco PLC (LON: TSCO)?

| 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.

Today’s news that Tesco’s (LSE: TSCO) CEO, Philip Clarke, is ‘on his way’ seems like one inevitable outcome from continuing poor trading. Firm’s can’t keep delivering falling sales and profit figures, quarter after quarter, without the top seat feeling increasingly uncomfortable.

TescoCurrent trading conditions are more challenging than anticipated the company says. The overall market is weaker and that has combined with the firm’s emergency investment, aimed at halting the firm’s slide, to produce sales and trading profit below expectations for the first half of the year.

In with the new

So all eyes turn to new recruit Dave Lewis, current president of Unilever’s Personal Care section who will be Tesco’s new CEO from 1 October 2014. Mr Lewis holds a CV stuffed with turnaround experience, which could herald salvation for Tesco’s business and its long-suffering shareholders. Expectations will be high, and to justify the pressure, Tesco will cross Mr Lewis’s palm with pieces of silver, lots of them.

With Tesco’s share price sitting at 291p, it’s down around 35% from its post credit-crunch high of around 450p it achieved in early 2010. So far, despite slipping trading, the firm has managed to keep paying its dividend, as the record shows:

Year to February 2010 2011 2012 2013 2014
Dividend per share 13.05p 14.46p 14.76p 14.76p 14.76p

Although the dividend payment has been flat for the last three years, adjusted earnings covered last year’s payment just over twice, so some slack remains that could see the current year payment held. That said, if the new CEO can’t halt the earnings’ slide, a dividend cut would probably result eventually.

Watch the cash

However, earnings don’t pay the dividend, cash does, and Tesco’s record on cash generation looks like this:

Year to February 2010 2011 2012 2013 2014
Net cash from operations (£m) 4,745 4,239 4,408 2,837 3,185

To put things in perspective, last year’s dividend payments cost the firm £1,189 million, so as long as capex doesn’t draw excessively on cash flow going forward, it seems that even with slipping sales, Tesco has a bit of wiggle room yet, which could see dividends continuing at their current level for a while.

Cash flow is consistent, but margins are thin, which makes profits vulnerable. If disruption to the sector is persistent and long-term, which I think it might be, there could be more downside risk than upside potential with Tesco shares, even from here. If the shares do slide further, capital loss could nullify investor gains from dividend income.

What now?

They say a new broom sweeps clean, and often that means an incoming CEO does a ‘kitchen sinker’, which might even include rebasing a dividend downwards. However, hopes will be high that management finally gets to grips with Tesco’s identity crisis and does actually turn the business around.

Tesco shares currently trade on a forward P/E rating around 11 for 2016 and the forward dividend yield is about 4.9%.

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.

Kevin Godbold has no position in any shares mentioned. The Motley Fool owns shares of Tesco.

More on Investing Articles

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

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 »