LONDON -- The shares of Tesco (TSCO 1.79%) (TSCDY 1.39%) have enjoyed a bumper start to 2013, having gained more than 13% in the year to date. The supermarket monolith has gradually recovered since last year's shock profit warning, which sent its valuation spiraling lower.
Although the retail environment remains difficult and Tesco's market share has been eaten away by both higher-end competitors such as Waitrose and budget chains such as Aldi, I expect Tesco to get on track as it refocuses its efforts on its key U.K. market and away from its international operations.
The company has demonstrated for more than two decades that it has what it takes to deliver spectacular growth. For example, the supermarket announced its "Price Promise" scheme earlier this month, which will enable customers to compare the cost of their shop with the group's main competitors. Although this scheme is just a small step on the road to recovery, I expect the supermarket to become much more aggressive in its measures in the coming months, including the development of its online format and extensive store refurbishments.
Earnings expected to rebound
Earnings per share are expected to have plummeted 17% in the year ending February 2013 to 31 pence, according to analyst estimates. Results are scheduled for release on April 17. However, earnings are expected to bounce back over the medium term: Growth of 5% to 33 pence per share is expected in 2014 before a further 8% rise to 35 pence in 2015.
Tesco's shares currently change hands on a forward P/E multiple of 11.6 and trade at a discount to the average of 13.3 for the wider food and drug retailers sector. The company's rating is expected to drop to 10.8 next year.
Check out the decent dividend expectations
Tesco is a celebrated pick for income investors seeking above-average dividend yields. The company has steadily built a progressive dividend policy, and despite the projected profit slide, the 2013 payout is forecast to remain steady at 14.8 pence per share versus 14.76 pence per share for 2012.
The dividend is anticipated to pick up again in the medium term as earnings recover, with payments of 15.5 pence per share and 16.3 pence per share penciled in for 2014 and 2015, respectively. These estimates provide respective yields of 4% and 4.2%, besting the 3.5% FTSE 100 average.
Not only does Tesco's position as a major player in the defensive food and drug retail sector give stockholders assurance over future dividends, but these payouts also boast coverage above the safety benchmark of two, should its earnings recovery come under further pressure. The predicted dividends for 2013 and 2014 boast cover of 2.1 times and 2.2 times, respectively.
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