Tesco’s (LSE: TSCO) share price has risen a lot over the last year. Currently, it’s hovering around 360p – about 30% higher than the level it was at a year ago.
Now, often when a stock has this kind of explosive jump, dividends yields on offer no longer look appealing. Yet that’s not the case here, as Tesco’s payout is also rising at a rapid pace.
Rising dividends
Last financial year (ended 29 February 2024), Tesco raised its dividend payout by a healthy 11%. That took the distribution to 12.1p per share.
Looking ahead, further dividend growth is anticipated. For the current financial year, City analysts expect Tesco to pay out 13.1p per share. The following year, they expect 14.4p per share. At today’s share price, these estimates translate to yields of 3.7% and 4%, which are decent (especially with rates on savings accounts falling).
It’s worth noting here that dividend coverage (the ratio of earnings per share to dividends per share) is expected to remain high at around two times in the next couple of years. This is very encouraging as a high dividend coverage ratio indicates that a payout is unlikely to be slashed.
Of course, dividends are never guaranteed. And analysts’ forecasts can be off the mark at times (so they shouldn’t be relied on).
Overall though, there’s a lot to like about Tesco’s dividend, in my view. The yield is healthy, the payout is rising, and coverage is strong.
Three more reasons to be bullish
Looking beyond the dividend, there are a number of other reasons to be bullish on Tesco shares right now.
For a start, the company is performing well. Earlier this month, it lifted its annual profit forecast. One thing that’s helping Tesco increase its profits is its Clubcard loyalty scheme. This gives it a ton of valuable data on its customers and their spending habits.
Second, its market share is rising. According to market research firm Kantar, Tesco’s market share recently hit 28% – the highest level since December 2017.
Then, there’s the valuation. Currently, the forward-looking price-to-earnings (P/E) ratio using next financial year’s earnings per share forecast (28.5p) is just 12.6. I think that’s a relatively attractive multiple given the company’s recent performance. I’ll point out that the average analyst share price target is about 11% higher than the current share price.
Potential for solid returns
Of course, Tesco operates in a very competitive industry. Right now, it’s facing intense competition from both discount chains such as Lidl and Aldi and premium supermarkets such as Ocado and Marks and Spencer (which is the fastest-growing supermarket in the UK at present). So, it’s going to have its work cut out maintaining its market share. If it gets complacent, market share could start to dwindle again.
I think the stock is worth considering at current levels , however. With a relatively low valuation and a rising dividend, I believe Tesco has the potential to deliver solid returns in the years ahead.
This post was originally published on Motley Fool
