It’s no secret that Tesco (LSE: TSCO) has been a dividend stock disappointment in recent years.
Only six years ago, it was considered to be a core holding among UK dividend investors. The UK’s largest supermarket had racked up an impressive 27 years of consecutive dividend growth, and the payout was generous. However, after paying out three identical dividend payments of 14.8p between 2012 and 2014, it shocked investors in 2015 when it cut its first half dividend by 75%. Since then, shareholders have received no dividend at all.
What went wrong?
Most investors are cognisant of the competitive landscape that exists within the UK supermarket sector at present. Around four years ago, German discounters Aldi and Lidl began their assault on the so-called ‘big four’ UK supermarkets, aggressively targeting market share. Tesco, Sainsbury’s, Asda and Morrisons, with their sparsely populated hypermarkets, were completely unready for the price war the discounters would unleash.
The discounters’ growth campaign has been a huge success, with their combined market share growing nearly 80% since 2013. Furthermore, it shows no signs of abating. Over the 12 weeks to 13 August, Aldi and Lidl sales grew 17.2% and 18.9% respectively, while Tesco generated growth of just 3%. Tesco’s market share has fallen to 27.8%, down from over 30% in 2011.
Compounding this, in 2014, Tesco announced that it had been overstating its profits. The supermarket watchdog discovered that it had been deliberately withholding money from suppliers in order to boost its performance figures, and many investors sued as a result. With profitability down significantly, Tesco was forced to cut its dividend. With this recent history in mind, is there any chance of a dividend in the future? Let’s take a look at today’s interim results for a clue.
The dividend is back
This morning’s results look to be showing signs of a turnaround.
Group sales for the period rose 3.3% (0.7% constant currency) to £25.2bn, and operating profit before exceptional times increased 27.3% (23.7% constant currency) to £759m. Pre-exceptional diluted earnings per share surged 71% higher to 5.46p and the company also managed to reduce its debt pile by 25%. Most importantly, for dividend investors, the supermarket announced that it will pay an interim dividend of 1p per share this year.
Chief Executive Dave Lewis commented: “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.”
Underwhelming yield
So can shareholders expect large dividend cheques going forward? Not in the short term, unfortunately. In today’s report, the company stated: “We anticipate a broadly one-third, two-thirds split between the interim and final dividend,” suggesting that Tesco will pay a final dividend of approximately 2p this year. A full-year payout of 3p equates to a dividend yield of just 1.6% at the current share price.
City analysts currently forecast a higher dividend payout of 5.29p for next year, a yield of 2.8%, however, that’s still a little underwhelming in my view, when you consider the yields on offer from many other FTSE 100 companies. As a result, I won’t be rushing to buy Tesco shares for the dividend any time soon.
