Wednesday, 6 August 2014

THOUGHTS: Tesco to slash dividend by 48% to 10p per share?

Analysts are constantly pushing out new views of various companies' futures. Tesco, as one of the biggest and most high profile, is no exception.

However, a recent analysts report from Brewin Dolphin by Nicla di Palma, has suggested that with the price war waging amongst other considerations the Tesco dividend could face cuts to 10p per share.

That is a pretty sharp haircut on the current 14.8p dividend for this year. In fact, it is a 48% cut. That's hefty, but I don't think it marks a dark cloud arriving sort of concern quite yet.

In fact, I would be pretty content with this sort of situation. According to the report this would free up £400 million a year for Tesco to pump back into the company. A significant amount indeed.

What is more, if the cut to such levels emerged with the arrival of the new CEO Dave Lewis it may be a strong way of showing the nature of the new man at the tiller. Such confidence is not easily bought but would be welcomed after the Clarke era.*

My investment in January along with subsequent dividend reinvestments has left me with shares in Tesco at a average share price of 329.17p. If the dividend did drop to 10p it would leave me with a yield on my original investment of 3.04%.

Does this worry me? Certainly, being below the FTSE 100 average of 3.2% would be annoying but it is far from disastrous.

Currently Tesco represents only about 5.5% of my portfolio. Certainly enough to make some impact on my dividend total. Indeed, it may threaten me meeting my portfolio yield goals for whatever year it (potentially) occurs.

However, in general I am still happy with this situation. With the consensus EPS for 2016 (24.28p) the dividend cover at 10p per share should be about 2.5 times (i.e. a payout ratio of about 40%). If these predictions come true this should mark the reduced dividend as pretty safe.

If the money goes to projects to revitalise the company all the better.

Tesco is still a strong company. With strong revenue, a market share still over a quarter in the UK and some promising investments elsewhere it still represents a strong company in my view. Its Hudl tablet and recent opening of Tesco Bank Current Accounts are also interesting and potentially lucrative.

Consequently, I would seriously consider placing a further investment in Tesco. However, that will likely not emerge until Dave Lewis is in charge and any shifts in the dividend payout emerge. If a drop to 10p per share did occur it is likely the share price will receive another drop from its current 245 price. An opportunity if ever to jump aboard again and average down my holding.

Indeed, even at the current 245p price if I doubled my holding I would average down my holding to about 285p per share. That would provide--with a dividend on 10p per share--a yield of 3.5%. Happily, this would then be above the FTSE 100 average yield.

Tesco undoubtedly rested on its laurels. Hopefully the arrival of Lewis from Unilever will help turn that around. Unilever--rather like its rival Procter & Gamble--is a company that seems unable to rest on its laurels. Constantly editing and adjusting its position to maintain its strength and growth. Maybe this bold tinkering approach will work well at Tesco as well?

*Incidentally, I think Clarke should have been offered a little more time to turn around the supermarket goliath. But Lewis comes with a strong CV and so it looks encouraging on paper.

[Creative Commons image reproduced from Flickr user wolfworld]

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