At the beginning of February, investors will vote on a Tesco (LSE: TSCO) special dividend. The company announced the special distribution at the beginning of December. It committed to returning £5bn to shareholders, part of the proceeds from the sale of its Thai and Malaysian businesses.
On top of the special distribution, the group has promised to contribute £2.5bn to its pension scheme, significantly reducing overall liabilities.
Both of these transactions could make the stock an attractive acquisition for my portfolio, I feel.
Details of the Tesco special dividend
As I noted above, Tesco plans to return £5bn to investors. This will work out at around 51p per share, based on its initial expectations. However, the transaction will not go ahead until the end of February. So, there’s still plenty of time for the details to change.
A share consolidation will accompany the special payout. That means the number of the company’s shares will be reduced to reflect the return of capital on the balance sheet.
At the time of writing, this Tesco special dividend is equivalent to a one-off yield of around 21%. That’s without including the company’s regular dividend payout to investors. I don’t think this will be badly affected by the asset sale. After all, the regular dividend is funded by operating profits from Tesco’s UK operation. Following the share consolidation, the standard distribution should remain the same.
On that basis, my calculations show that the stock will continue to offer a 3.4% dividend yield after the special dividend.
Long-term growth
I reckon these numbers are all highly encouraging. I’ve long been bullish on the outlook for Tesco shares, because the company is one of the largest and most efficient retailers in the country. This extra chunk of income, alongside the regular distribution, only increases the shares’ appeal, in my view.
What’s more, I reckon the business will prosper over the long term. As mentioned above, Tesco’s dominance of UK retail is virtually unrivalled. That should help the company stay ahead of the competition for years to come. It also owns the wholesaler Booker. The pandemic hit trade at this division in 2020, but a recovery is projected next year.
This earnings growth, coupled with the Tesco special dividend, suggests that the stock could be a profitable investment for 2021 and beyond, even though supermarkets remain under pressure from discount-focused rivals.
The group has come a long way from its accounting scandal in 2014. Profit margins have fully recovered, and debt has fallen to more sustainable levels. With some of the Asia sale proceeds earmarked for reducing liabilities further, I think Tesco’s position as the dominant retailer in the UK could improve.
To put it another way, I would buy the shares for the Tesco special dividend and stay with the stock for its long-term income and growth potential.
