The Tesco (LSE: TSCO) share price has slumped 25% since the beginning of 2022. It’s fallen as worries over soaring costs and falling consumer spending have intensified.
The decline in Tesco’s shares has made it a popular stock with dividend investors though. For this fiscal year (to February 2023) the dividend yield sits at 4.9%.
This is a full percentage point higher than the FTSE 100 average. And things get even better for next year when the supermarket’s yield rises to 5.1%.
But does this make it a top dividend stock to buy? Here, I’ll drill into its dividend forecast for the next two years and reveal whether I’d buy the retailer for my portfolio.
A solid record
Tesco, like many UK shares, had to ditch its progressive dividend policy during the height of Covid-19. But, pleasingly, the business remained committed to shareholder payouts during the tough period.
In fiscal 2021, the company froze dividends at 9.15p per share. To put this in perspective, many other income-paying stocks had to introduce whopping cuts. What’s more, Tesco also paid £5bn worth of special dividends following the sale of its Asian operations.
In the past five years, the retailer’s raised the annual ordinary dividend by a whopping 263%. This culminated in last year’s 10.9p per share reward.
City analysts expect a lower payout of 10.76p this year. But they are tipped to rise again to 11.14p in fiscal 2024.
As well as carrying those FTSE 100-beating yields, predicted dividends at Tesco are also well covered by anticipated earnings. Dividend cover ranges at a healthy 1.9 times to 2 times for the next two years.
Shopper exodus
A reading of 2 times and above offers a wide margin of error for investors. But in the case of Tesco, I’d be looking for higher cover. This is because I fear earnings could slump as the cost-of-living crisis worsens.
The company’s losing business to discounters like Aldi at an alarming rate. It lost £63.6m worth of sales to the German chain in the three months to 4 September, according to Kantar Worldpanel. This was more than any other supermarket and comes despite its ‘Aldi Price Match’ programme.
Customer switching to lower-cost operators threatens to get worse too. Not only is rising inflation and interest rate hikes putting consumer spending power under suffocating pressure, but the likes of Aldi and Lidl are also rapidly expanding their store estates.
As a consequence, Tesco might have to slash prices at the expense of margins. This could be disastrous, given the retailer’s already-weak margins. These sat at just 4.4% in the UK and Ireland during fiscal 2022.
The verdict
As an investor, I’m attracted by Tesco’s market-leading delivery operation. Revenues here could soar in the years ahead as online grocery sales catch up with the broader e-commerce sector.
Having said that, the prospect of intensifying competition and rising costs in the short term and beyond make this a dividend stock I’m happy to avoid.
