Tesco PLC’s Dividends Could Be Slipping

tesco2I won’t go over the troubles that Tesco (LSE: TSCO) has been having again — we’re all only too familiar with them, especially having seen the share price drop more than 30% over the past 12 months to 249p.

But Tesco was generally seen as a steady dividend-payer, and many an income investor has a few shares tucked away in their portfolio. But is it still a good bet for a long-term seeker of cash?

Here’s the past few years dividends, together with two years of forecasts:

Year Dividend Yield Cover Rise
2011 14.46p 3.6% 2.52x +10.8%
2012 14.76p 4.6% 2.73x +2.1%
2013 14.76p 4.0% 2.29x 0%
2014 14.76p 4.4% 2.17x 0%
13.96p 5.6% 1.77x -5.4%
13.65p 5.5% 1.76x -2.2%

* forecast

High yields?

Now, those yields still look good, but they’re deceptive. They’re remaining strong, and are forecast to rise handsomely this year, for the worst of reasons — the share price is slumping. It’s no good looking at the forecast 5.6% that someone buying today might get if you’d bought the shares a few years ago at around 400p — your effective yield on the price you paid would be a far less exciting 3.5%.

And if you’re looking for money to provide for your old age in 20 years or more, the potential long-term record against inflation is far more important than today’s yield.

Set to fall?

So far Tesco has managed to at least maintain its dividend at 14.76p per share, but analysts don’t believe it can continue to keep it up, with those forecasts having been cut in the past month.

What does the company say? Well, Tesco has been tight-lipped about its dividend prospects, with its 2014 annual results announcement sticking factually to the amount paid, and June’s first-quarter update saying nothing.

But the turnaround is costing a lot of money and is not bringing results as quickly as many had expected, earnings are still dropping, and the dividend yield is falling. I reckon there’s a better-than-evens chance of a cut.

Not the best choice

For long-term income investors the question is how long will it take Tesco to get back to inflation-beating dividend rises, if ever. And then how many years will it take to catch up with the inflationary rate that it will be likely to have missed for at least five years in a row.

All that makes me feel there are better choices out there for long-term income seekers — Tesco is perhaps one best left for optimistic recovery specialists.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.