The Tesco (LSE: TSCO) share price has risen 17% so far in 2025, and it gained a couple of percent early Thursday (2 October) on first-half results. Despite competition from cut-price cheapies, Tesco posted yet another UK market share gain, to 28.4%.
A 5.1% rise in adjusted first-half sales lies behind the feat, and we’ve now seen market share gains for 28 consecutive four-week periods.
Adjusted headline measures were up across the board — except for debt, which is down, so that’s good. Net debt fell 3.8%, while adjusted earnings per share (EPS) gained 6.8% with free cash flow up 2.9%.
Statutory figures were less impressive, with EPS on a continuing operations basis down 2.7%. But CEO Ken Murphy is “pleased with our first half performance.” I expect most Tesco shareholders will be too.
Dividend boost
The board raised the interim dividend 12.9% to 4.8p per share, and that’s key for many long-term Tesco investors. If the same increase is repeated at full-year time, we’d be looking at a 3.6% dividend yield based on the current share price. It would be well ahead of the 3.4% year-on-year increase currently predicted, so broker forecast upgrades may well be on the cards.
Last year’s dividend was litself lifted 13.2%, and that’s the kind of thing I’m looking for as a long-term investor. A strongly progressive dividend can be worth far more over the decades than a short-term higher yield that can’t be sustained.
Dividends are never guaranteed, not even at Tesco. And the Tesco dividend went into a reset in 2016. But since then it’s been growing steadily. And City analysts expect it to keep on going — covered close to two times by earnings.
Tesco has a dividend reinvestment plan, which I always like to see. It means investors can plough their dividend cash into new shares without having to pay fees on the open market.
Outlook
In its outlook update, Tesco reminded us of the biggest danger to its market dominance. “In April, we noted an increase in the competitive intensity of the UK market,” the company said, adding “competitive intensity remains elevated.”
But even against that background, the board upped its full-year profit guidance. We should expect adjusted operating profit to come in between £2.9bn and £3.1bn — from previous guidance for £2.7bn to £3.0bn.
Free cash flow should be “within our medium-term guidance range of £1.4bn to £1.8bn.” That concerns me a little, considering last year’s figure of £1,750m was ahead of the mid-point of that range. And it was well below the previous year’s free cash flow figure of £2,063m.
Verdict
Pressure on cash flow has to be a result of the noted intense competition and supplier cost inflation. And I think it’s the key risk to watch for in the medium term. If anything is likely to dent the dividend, it has to be cash flow weakness.
But do I think investors with a decade-plus horizon should consider buying Tesco shares? Yes — as a potential bedrock component of a diversified Stocks and Shares ISA.
