I’m always looking for companies that generate steady returns, and I think now could be a great time to add the UK’s biggest retailer to my portfolio to increase passive income.
Share price climbing
At the time of writing, the Tesco (LSE: TSCO) share price is 261.5p, and this is down 11% since the start of 2022, but has been mostly trending upwards since the 2022 AGM in mid-June.
Every little helps
As leader of the so-called ‘Big Four’ grocers, it’s not too much of a surprise to see long-term profitability in the underlying financials.
The food seller has posted net profits of over £1bn in each of the last five years except for Covid-hit 2020 (where profits were still £0.97bn!). Over the same period, revenues have been reliable and predictable, sitting between £57bn and £64bn.
When looking at profit margins, the figures are slightly less impressive when compared to some FTSE 100 peers. Net profit margin for 2022 was 2.41%, although this is in line with that of rival supermarket Sainsbury’s net margin of 2.26% for its financial year 2022.
Profitability pays
Tesco’s dividend yield is currently sitting at 4.03%, marginally above the FTSE 100 average.
But the key to generating regular returns over the long run is consistency. And when it comes to dividends, I think it’s fair to say Tesco has been consistent. It’s paid out interim and final dividends every year for the past five years. This was after a period with no dividend payments between 2015 and 2016, but its policy currently seems to be to reward shareholders, and that is good news for my portfolio and passive income.
Future outlook
With the UK cost-of-living crisis in full swing, Tesco is already seeing an impact on consumer spending. In June, it backed up data from the Office of National Statistics suggesting that consumer spending habits are changing, with customers seemingly spending less in supermarkets because of inflation.
But I think Tesco is almost uniquely placed in the retail space to continue delivering profits and dividends to shareholders.
Tesco is well known to have significant purchasing power in core food and beverages markets, where suppliers know that not stocking their products with the UK’s biggest supermarket may have significant consequences for the viability of their business. This puts Tesco in a strong position to be able to manage costs and to maintain margins through any economic environment.
In addition, Tesco has a heavily diversified portfolio, both in terms of products being sold, and in terms of geographical markets it’s operating in. So whilst it’s fair to say the impact of the UK cost-of-living crisis will hit Tesco, the fact that it’s operating in other regions where inflationary factors are different to the UK — and that it stocks many inelastic products that consumers need to buy regardless of price — makes it seem unlikely that sales drop substantially.
Overall, I think Tesco represents a compelling opportunity for generating passive income in my portfolio. Its consistent financial performance and dividend payout is something that I really think I could rely upon over the next few years, so I’m strongly considering taking a position.
