Many top FTSE 100 companies are currently offering dividends that knock spots off the interest you can get from cash or bonds.
In this festive series of articles, I’m assessing how the companies measure up as income-generators, by looking at dividends past, dividends present and dividends yet to come.
Today, it’s the turn of the UK’s number one supermarket Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US).
Dividends past
The table below shows Tesco’s five-year earnings and dividend record.
| 2008/9 | 2009/10 | 2010/11 | 2011/12 | 2012/13 | |
|---|---|---|---|---|---|
| Statutory earnings per share (EPS) | 27.14p | 29.33p | 33.10p | 34.98p | 1.54p |
| Underlying EPS (diluted) | 28.87p | 31.66p | 36.26p | 40.31p | 35.97p |
| Dividend per share | 11.96p | 13.05p | 14.46p | 14.76p | 14.76p |
| Dividend growth | 9.7% | 9.1% | 10.8% | 2.1% | 0.0% |
As you can see, Tesco’s high single-digit/low double-digit annual dividend increases have ground to a halt, as the company tries to turn around its faltering UK business. The average annual dividend increase over the five-year period works out at 4.2% — markedly lower than rivals J Sainsbury and Wm Morrison Supermarkets.
Tesco paid out a total of 68.99p a share in dividends over the five years, covered 2.5 times by ‘underlying’ EPS of 173.07p, and 1.8 times by warts-and-all statutory EPS of 126.09p. For the latest year (2012/13), cover by underlying EPS was 2.4, but the dividend was uncovered by statutory EPS.
A substandard dividend performance in recent years compared with rivals, and the Tesco’s own long-term historical record.
Dividends present
For the current year (ending February 2014), Tesco has already declared an interim dividend of 4.63p a share, unchanged from last year.
Analysts’ forecasts of a full-year dividend increase for this year have been revised down over the course of the year. Most of the experts are now expecting an unchanged final dividend of 10.13p when the company announces its annual results on 16 April — putting the full-year dividend at 14.76p for a third consecutive year.
Meanwhile, following last year’s 11% decline in underlying EPS, the expectation this year is for a drop of 14% to 32p, reducing dividend cover from 2.4 to 2.1.
At a share price of 335p, Tesco’s current-year dividend represents a yield of 4.4%.
Dividends yet to come
Analysts now see the dividend rise they’d previously expected this year to come through in 2014/15, with a 5.8% rise to 15.64p, followed by a 5% rise to 16.42p for 2015/16. Underlying EPS is expected to increase at the same kind of rate, maintaining dividend cover at 2.1.
In addition to Tesco’s particular problems, the ‘Big Four’ middle-market supermarkets (Tesco, Asda, Sainsbury’s and Morrisons) recently all lost market share together for the first time on record. The squeeze is increasing from posher-nosh purveyors Waitrose and Marks & Spencer, and discounters Aldi and Lidl.
If, as some are suggesting, Tesco uses its might to launch a serious price war, the company’s dividend could have to stay on hold a while longer.
Tesco’s shareholders can hope, rather than expect, dividend growth to resume in 2014/15. However, the days of double-digit growth may be a thing of the past, if we are seeing a structural shift to more intense competition in the supermarket sector. Moderate dividend increases — by which I mean a few points ahead of inflation — may become the norm, even in benign economic times.