Tesco (LSE: TSCO) shares have done well in 2024, up 18%. However, they’ve been on a bit of a downer since September. That makes me wonder if this dip is temporary, and how it may affect dividends going forward.
For now, the mild dip doesn’t appear to have dented the company’s dividend plan. This year’s final dividend is expected to be around 13p per share, forecast to rise to 15p by 2027.
With that growth, the yield’s forecast to reach 4.48% by 2026. If that continues, it could climb above 5% by 2027.
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That would certainly add to the stock’s already attractive nature as a regular income earner.
| Year: | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|
| Dividend per Share: | 0.121 | 0.1326 | 0.1437 | 0.1549 |
| Yield forecast: | 4.33% | 3.84% | 4.16% | 4.48% |
Moderate growth potential
The above forecast assumes the company can continue performing well or increase its payout ratio. It managed to do so in both 2020 and 2022, and again this year, but growth has been sporadic. Whether or not it can keep increasing dividends may depend on its revenue and earnings.
There seems to be some expectation of steady but moderate growth in those areas.
Revenue fell short of estimates in 2023 but is forecast to grow steadily in the coming years. It’s expected to reach almost £74bn by 2027, with earnings per share (EPS) expected to climb 20% to around 33p.
The average 12-month price forecast is £3.99, a 15.5% increase from today. However, analysts aren’t in close agreement, with the most optimistic eyeing £4.45 and the most bearish looking at £2.70.
Still, it’s positive overall.
Pros and cons
Tesco remains one of the most popular grocery chains in the UK, driven by competitive pricing and widespread appeal. It offers attractive price-matching with its Clubcard membership to compete with more budget chains. On the higher end, it competes with grocers like Marks and Spencer with its Tesco Finest premium goods.
With inflation putting strain on budgets this year, sales in its Finest range have enjoyed impressive growth of 15%.
However, there are also factors that could limit growth. The recent UK Budget’s increase in national insurance (NI) contributions will start next April. With Tesco employing over 300,000 people, the cost is estimated to be £1bn over four years.
It may have to pass this cost on to customers, impinging on its low-cost model and threatening its market share. Of course, the increase would affect all UK businesses but Tesco’s particularly exposed due to its size.
The bottom line
Tesco dividends have had a bumpy ride since Covid but with inflation falling, things seem to be back on track. The steady and moderate growth exemplifies the stock’s defensive nature, offering the potential for consistent and reliable income.
The new budgetary measures are a risk but I see no immediate threat to Tesco’s dividends. I think the stock’s worth considering for an income portfolio. I increased my position in Tesco this year and will likely do so again in the new year.
