Up until now, Tesco (LSE: TSCO) was hanging pretty well since the pandemic started in February last year. Tesco shares have already gained nearly 4% since the beginning of the year. They are currently trading around their pre-Covid-19 levels. At this price, I think many investors and hedge funds would consider Tesco an attractive investment for 2021 and beyond.
More importantly, a recent special dividend announcement and a share consolidation plan are cause for growing interest in Tesco shares. I don’t think it’s clear yet how investors will respond to this announcement in the short term. But as a long-term value investor, I think this is a great opportunity to buy Tesco shares.
Tesco announces £5 special dividend, share consolidation
Last week, Tesco announced a special £4.99bn dividend following the sale of its Asian arm last year. The company is distributing all of the £7.8bn it generated from the sale of its operations in Thailand and Malaysia. It is adding the remainder to its pension program.
On Friday, 12 February 2021, the company will hold a virtual general meeting to announce that shareholders will receive 15 new shares for every 19 shares that they own. Tesco’s 50.93p dividend payout is worth around a fifth of the current share price, and could potentially cause a big drop in price. There’s also a risk that existing investors that might face potential tax bills from Tesco’s special dividend payout
To prevent that, Tesco expects to complete the share consolidation to maintain share prices at comparable levels. Essentially, Tesco shares will trade at the same price following the share consolidation as they did before. However, the number of total shares will be reduced.
Tesco dividend
In the current circumstances, Tesco pays out a dividend of 6.5p per share or nearly 4% interest annually. While this does not put Tesco among the high-yield paying dividend stocks in the UK share market, the largest British retailer is still, in my view, one of the safest options out there in terms of predictability and distribution of dividends.
The bottom line
Overall, I see more reasons to be optimistic right now about Tesco’s future. The £5bn special dividend announcement has prompted Tesco’s share price rise. On top of that, Tesco has reported record Christmas sales, when it experienced a boost of £1bn in extra sales during the holidays.
Looking at the numbers, I reckon Tesco remains a solid passive income stock. It operates in a defensive industry and its market share is not likely to be shaken in the near future. Yes, there are lots of challenges ahead for Tesco. The biggest challenge of all is Brexit disruptions. This has already caused a major problem for Tesco in delivering food supplies to Northern Ireland.
At the same time, Tesco is still the second-largest grocery business in Ireland and the biggest player in Northern Ireland. And, in 2020, Tesco had the largest market share in the UK with 27%. So overall, with an attractive dividend payment history and an annual yield of nearly 4%, I think that unless the market crashes in 2021, Tesco’s share price could rise further over the coming months.
