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Tesco shares: Good dividend news

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Tesco (LSE: TSCO) has been performing well lately. It voluntarily handed back over half a billion pounds in business rates relief. That suggests the company is very confident about its performance. But there is a more important piece of news about Tesco shares, which I think the market is overlooking. It’s worth knowing about — I think it could make Tesco shares worth buying right now.

Tesco is focusing

The supermarket chain is very successful in its home market of the UK. But that has become more competitive. Chains like Aldi and Lidl have kept Tesco on its feet. Indeed, even US retailing giant Wal-Mart has decided to sell its UK Asda business.

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Tesco has responded by focussing more on its core business. For example, in June it agreed to sell its business in Poland. It has also been in the process of pulling out of south east Asia. Tesco had a sizeable business in Thailand and Malaysia. Its familiar Tesco Lotus stores are a common sight there and popular with British holidaymakers as well as locals. I think withdrawing from those distant markets makes strategic sense for Tesco. It will enable the company to focus more on the UK, where it is the market leader. That should be good for Tesco shares.

But the most exciting part from a shareholder’s perspective is the financial payout. The company expects to receive around £8bn for the sale. This week Tesco announced that it had finalised the sale, which is set to complete this month. Surprisingly, the market seemed to pay little attention. The shares only moved a few pence over the week.

Why I think Tesco shares will do well

The company said in its interim results that it plans to use £2.5bn of the proceeds to eliminate the deficit in its pension fund. That cleans up the balance sheet, which should be good for Tesco shares.

But there is a more immediate reason to get excited about Tesco shares. The chain plans to return £5bn of the proceeds to shareholders. That works out at around 50p a share!

It hasn’t confirmed whether this will be a special dividend, or a share buyback. If it is through a share buyback, the number of shares in circulation will be reduced, which should increase the value of each outstanding share. With a special dividend it will be a straight payment. With Tesco shares trading around 225p currently, that is a big payout. Once the capital return plan is announced, if it is a special dividend I expect the shares to jump on the good news.

Tesco raised its interim dividend this year by an impressive 20%. That suggests a full-year payout of 11p, which would be a yield close to 5% even without considering the special dividend. So Tesco is already an attractive income pick. I also expect that a special dividend could lead to an appreciation in the share price too.

I have put Tesco on my watchlist and am keen to find out more about the capital distribution. The company will likely announce any special dividend shortly after the upcoming completion of the Asian sale. So I think the time to make a move is now.

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christopherruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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