Tesco share price: dividend boost could push shares towards 2019 highs

By Michael Hewson

Tesco’s share price since the beginning of 2018 hasn’t reflected what was a good last financial year for the supermarket giant, with a 29% jump in pre-tax profit to £1.67bn, while revenue rose 11% to £63.9bn.

Since the release of those annual numbers in April, Tesco’s share price has fallen over 8% to three-month lows earlier this month, though year-to-date, it is still in positive territory.

Q1 figures likely to evidence tough environment
When looking at the food retail sector and how competitive it is, Tesco will do well to be able to reproduce the kind of profit performance we saw last year, in the weeks and months ahead. Tomorrow’s upcoming Q1 sales numbers are likely to be a reminder that the tough retail environment is likely to remain a drag on profit margins over the next few months. Its AGM is also likely to see some awkward questions posed about executive pay.

The competitive retail environment appears to have been borne out by the latest Kantar data, which showed that the UK’s number one supermarket’s share dropped to 27.3% at the end of last month, from 27.7% a year ago. Once again this has been due to the discounters Aldi and Lidl eating into its market share, with the Co-op also staging a comeback. According to Kantar, Tesco sales for the 12-week period came in flat, with sales of their own-label range doing particularly well

The company’s ‘100 years of value’ campaign also helped boost sales, though the discounts being offered may have crimped margins, especially since food price inflation appears to have started to edge higher this year. Expectations are for margins to slip back to 3.2%, from 3.4%, though this should be manageable.

Tesco share price could get dividend boost
With a dividend cover of over 2 there is scope for the dividend to head towards 3%, given that at current levels it sits at 2.5%. A lift here could be the tailwind Tesco’s share price needs to move it back to the highs of this year.

The competitive retail space has seen Tesco pull back from a number of its non-core operations, as it strives to keep a lid on its costs. The decision earlier this year to pull out of the mortgage market and offload its mortgage book is just one such example of focusing on its core competencies.

Executive pay is also likely to be a hot button issue, with some investors unhappy with the £4.5m pay deal for CEO Dave Lewis, which included a bonus and shares scheme. While it is less than the £5.3m he received the year before, it is still ‘awkward optics’ for a business that is set to cut or redeploy nearly 9,000 staff this year alone. There could see some awkward questions for Tesco management at tomorrow’s AGM.

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