October 19, 2012
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 policycontinues.
Tesco's dividend growth scoreI analyze four different features of a company to judge whether its dividend can continue to rise:
- Dividend cover: the recent dividend was covered around 2.5 times by earnings. 4/5
- Net cash or debt: net gearing just over 50% with debt around 2.5 times earnings. 3/5
- Cash flow: historically, good cash support for profits. 4/5
- 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 summaryCash 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.
Tesco is one of several dividend out-performers on the London stock exchange.
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