Tesco (LSE: TSCO) is a popular income stock in the UK and it’s easy to see why. Last financial year, the company paid out dividends of 10.9p per share, which translates to an attractive yield of 4.2% at today’s share price. Here, I’m going to look at the Tesco dividend forecast for this financial year and next. I’ll also explain whether I’d buy shares in the supermarket giant for my portfolio today.
Tesco dividend forecasts
Before I reveal the dividend forecasts for the years ahead, it’s worth explaining how Tesco’s financial year works. Unlike a lot of other UK companies, Tesco doesn’t end its financial year on 31 December. Instead, it completes on 26 February. So the current financial year (FY2023) is set to end on 26 February 2023. FY2024 will then end exactly 12 months later.
As for the dividend forecasts, City analysts currently expect Tesco to pay out 10.7p per share for FY2023 and 11.2p per share for FY2024. At the current share price of 260p, the projected payouts equate to yields of 4.1% and 4.3%. These are obviously attractive in the current environment.
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Of course, the figures above are just estimates and these can be inaccurate at times. It’s worth noting that while Tesco’s aim is to grow its dividend each year, it is also targeting a payout of around 50% of earnings. So if earnings were to fall, due to higher costs for example, investors may see a reduction in the dividend.
Are Tesco shares worth buying?
So would I buy Tesco shares today? Well, there are certainly things I like about the stock.
For starters, I like the company’s defensive attributes. If the UK sees a recession, Tesco’s sales are not going to fall off a cliff as people will still need to eat. This is a valuable attribute right now, given that economic conditions are deteriorating.
Secondly, the valuation seems very reasonable. At present, analysts expect the group to generate earnings per share of 21p for FY2023. That puts the stock on a price-to-earnings (P/E) ratio of just 12. I think that valuation offers a margin of safety.
However, I also have some concerns. One is in relation to the long-term growth potential here. To grow its dividend over time (and help investors beat inflation), Tesco will need to increase its sales and profits. That’s easier said than done though. In the current environment, we could see consumers continue to move to low-cost outfits such as Aldi and Lidl. Meanwhile, Amazon is ramping up its operations in the UK supermarket space and looking to capture market share.
There’s also the debt on the balance sheet. At the end of February, Tesco had net debt of £10.5bn. In a rising-interest-rate environment, this adds risk. Higher interest payments could result in less cash available for dividends.
Better stocks to buy?
Weighing everything up, I’m happy to leave Tesco shares on my watchlist for now. The yield here does look quite attractive. However, I think there are other stocks that are a better fit for my portfolio right now.
