Tesco shares: Good dividend news

I think this recent news from Tesco could be good for the share price, especially when it comes to the dividend.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

8%+ yields! Should I buy these FTSE 100 income shares this month?

Christopher Ruane weighs some pros and cons of two FTSE 100 shares, both of which have a dividend yield over…

Read more »