Tesco’s (LSE:TSCO) share price has ballooned in value in recent months. In fact a 19% rise since the start of 2023 makes it one of the FTSE 100’s best performers in the year to date. Yet based on current dividend forecasts, Tesco shares still offer market-beating yields.
At 268p per share, Britain’s biggest retailer carries a healthy 4.1% yield for the financial year to February 2024. This comfortably beats the 3.6% forward average for FTSE shares.
Things get even better for the next fiscal year, too. For then the dividend yield marches to 4.4%.
But how realistic are current dividend forecasts? And should I buy Tesco shares for my portfolio?
Robust forecasts
Tough trading conditions mean Tesco has kept the annual dividend locked at 10.9p per share for the last two years.
And City analysts are expecting payouts to remain at these levels for financial 2024. They suggest that yearly earnings will drop 4% as margins stay under extreme pressure.
But the number crunchers are predicting that dividends will rise again in fiscal 2015 as earnings bounce 13%. The total dividend is tipped to rise to 11.9p per share.
It seems that these dividend estimates look pretty robust, too. Predicted rewards are covered two times by projected earnings over the next two years.
Meanwhile, Tesco’s balance sheet just about suggests it could have the strength to at least hold the annual dividend this year.
The company had net debt of £10.5bn as of February, roughly unchanged from a year earlier. This means that its net debt to EBITDA ratio sits at 2.6 times.
This could be considered too high for some dividend investors. But it is within the grocer’s target range, and below the level of three times that signals potential financial vulnerability.
…but are Tesco shares a buy?
So will I be buying Tesco shares to boost my own passive income? The answer is no.
The supermarket has a mountain to climb to get earnings moving higher again, as latest results last week illustrate. Underlying operating profit dropped 7.1% in the 12 months to February 2023 as volumes dropped and margins shrunk.
Tesco’s adjusted operating profit margin fell a further 57 basis points last year, to 3.8%. And it looks set to continue falling as competition in the food retail sector heats up.
Britain’s supermarkets remain locked in a price war that has been worsened by the cost-of-living crisis. It’s a battle that looks set to intensify too as Aldi and Lidl continue their store expansion programmes, Amazon steps up its fight online and on the high street, and investment in food delivery improves across the sector.
Tesco can look to its sector-leading online channel as something to celebrate. As e-commerce grows, this could help profits to rebound over the longer term.
But on balance I don’t find the company’s shares very attractive. I think there are better FTSE 100 stocks for me to boost my dividend income.
