ii view: Tesco keen to keep growing generous dividend

An estimated dividend yield of almost 4% and starting a share buyback programme. Buy, sell or hold? 

First-half results to 31 August 2021

• Revenue up 5.9% to £30.4 billion
• Adjusted retail operating profit up 17% to £1.39 billion
• Interim dividend unchanged at 3.2p per share
• Launching a £500 million share buyback programme

Guidance:

• Now expects full-year retail operating profit of between £2.5 billion and £2.6 billion from a previous £2.3 billion

Chief executive Ken Murphy said:

"We've had a strong six months; sales and profit have grown ahead of expectations, and we've outperformed the market. I'm really pleased with our progress as we increased customer satisfaction and grew market share leading to a strong financial performance. With various different challenges currently affecting the industry, the resilience of our supply chain and the depth of our supplier partnerships has once again been shown to be a key asset.”

ii round-up:

Tesco (LSE:TSCO) employs over 350,000 people across stores and distribution centres in both the UK, Ireland and Central Europe. 

The Hertfordshire headquartered company generated revenue of over £57 billion and operating profit of more than £1.7 billion in its last full financial year to the end of February 2021. 

It also owns wholesaling business Booker, along with Tesco Bank.

For a round-up of these latest results, please click here. 

ii view:

Tesco has been undergoing a period of significant change. Product ranges have been scaled down to aid buying power and competitiveness with the discounters Aldi and Lidl. Its previous expansion overseas has been largely reversed, with its Asian operations previously sold. Now, former Walgreens executive Ken Murphy is building on the reset strategy and, after a year in charge, has outlined refreshed plans to direct cash or capital across the company.  

These now include a commitment to growing the dividend, maintaining an investment grade balance sheet, investing in the business and returning any surplus cash to shareholders. It now aims to grow the dividend per share each year, broadly targeting a pay-out of around 50% of earnings, and is commencing a £500 million share buyback programme as a further avenue to return cash to shareholders. 

For investors, competition across the sector remains intense, with the discount retailers still opening new stores. Changes of ownership at rivals ASDA and Morrisons (LSE:MRW) may now see increased efficiencies being targeted, while broader national and global supply chain issues, driver shortages and pressured consumer spending from elevated energy prices are all potential overhangs. 

On the upside, programmes to generate cost savings of £1 billion over three years are being pursued, investment in online automation should add to long-term efficiencies, while its price match with Aldi products continues to be expanded. A long established Clubcard offers significant customer insight, and the performance of its banking unit is on the up. In all, with Tesco taking the fight to the discounters and greater clarity now underpinning shareholder returns, plus an estimated forward dividend yield of almost 4%, this retailing giant will likely continue to receive investor support. 

Positives

• Growing online sales 
• Attractive dividend payment (not guaranteed)

Negatives

• Industry competition remains intense
• Uncertain economic outlook

The average rating of stock market analysts:

Strong buy