Tesco: A FTSE 100 Dividend-Raising Star

LONDON -- In an outcome that's tough on investors, the FTSE 100 has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF, for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Year

2007

2008

2009

2010

2011

Dividend per share (in pence)

19.1

20.2

17.1

16.2

18.1

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is Tesco (LSE: TSCO.L  ) (NASDAQOTH: TSCDY.PK)

The big question is: Can the company's dividend continue to outperform its index? Let's take a closer look.

Tesco owns the U.K.'s largest supermarket chain and is expanding abroad as well. With the shares at 322 pence, the market cap is 25.8 billion pounds. This table summarizes the firm's recent financial performance:

Trading Year

2007

2008

2009

2010

2011

Revenue (in millions of pounds)

47,298

53,898

56,910

60,455

64,539

Net cash from operations (in millions of pounds)

3343

3960

4745

4239

4408

Diluted earnings per share (in pence)

26.61

26.96

29.19

34.25

36.64

Dividend per share (in pence)

10.9

11.96

13.05

14.46

14.76

So, the dividend has increased by 35% during the last five years -- equivalent to a 7.9% compound annual growth rate.

Tesco describes itself as one of the world's largest retailers with operations in 14 countries and employing more than 500,000 people. In the U.K., it is the country's largest retailer. Britain is important to Tesco as it currently accounts for two thirds of global sales. That's why the shares fell when profits slipped recently, and the directors admitted that the U.K. store portfolio had suffered from under-investment, thanks to the pursuit of international growth. There's evidence to suggest where investment has gone in the statistic that two-thirds of Tesco's selling space is overseas. So the majority of stores are abroad despite foreign sales only contributing one third of revenues.

Right now, the directors have firmly re-focused on the core U.K. market, and a domestic investment program is under way. Tesco has some catching up to do at home, but I'm with those that think it can achieve that and go on to grow international sales and profits. If the company pulls off that double whammy, there's potential cheer for those using the current share price setback to lock in a decent dividend yield, as the progressive dividend policy continues.

Tesco's dividend growth score
I analyze four different features of a company to judge whether its dividend can continue to rise:

  1. Dividend cover: the recent dividend was covered around 2.5 times by earnings. 4/5
  2. Net cash or debt: net gearing just over 50% with debt around 2.5 times earnings. 3/5
  3. Cash flow: historically, good cash support for profits. 4/5
  4. Outlook and recent trading: earnings down in recent trading and the outlook is flat. 3/5

Overall, I score Tesco 14 out of 20, which encourages me to believe the firm's dividend can continue to out-pace dividends from the FTSE 100.

Foolish summary
Cash flow is backing profits, and debt appears to be under control. The short-term outlook may be flat but it's hard to see Tesco's domestic investment failing. To me, the progressive dividend policy looks secure.

Right now, the forecast full-year dividend is 15.26 pence per share, which supports a possible income of 4.7%. That looks attractive to me.

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Further investment opportunities:

Kevin Godbold owns shares in Tesco. The Motley Fool owns shares in Tesco. The Motley Fool has a disclosure policy.
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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 20, 2012, at 4:06 PM, Sotograndeman wrote:

    I think it's always important to remember that Tesco has more value in real estate than it's market cap. This adds greatly to its stability and attractiveness, and underpins the likelihood of a growing dividend.

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