Tesco's (LON:TSCO) Shareholders Will Receive A Bigger Dividend Than Last Year

The board of Tesco PLC (LON:TSCO) has announced that it will be paying its dividend of £0.0945 on the 27th of June, an increased payment from last year's comparable dividend. The payment will take the dividend yield to 3.6%, which is in line with the average for the industry.

We've discovered 1 warning sign about Tesco. View them for free.

Tesco's Projected Earnings Seem Likely To Cover Future Distributions

Unless the payments are sustainable, the dividend yield doesn't mean too much. The last dividend was quite easily covered by Tesco's earnings. This indicates that quite a large proportion of earnings is being invested back into the business.

Over the next year, EPS is forecast to expand by 32.1%. If the dividend continues on this path, the payout ratio could be 47% by next year, which we think can be pretty sustainable going forward.

Check out our latest analysis for Tesco

Dividend Volatility

While the company has been paying a dividend for a long time, it has cut the dividend at least once in the last 10 years. The annual payment during the last 10 years was £0.187 in 2015, and the most recent fiscal year payment was £0.137. The dividend has shrunk at around 3.1% a year during that period. Declining dividends isn't generally what we look for as they can indicate that the company is running into some challenges.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. It's encouraging to see that Tesco has been growing its earnings per share at 20% a year over the past five years. The company doesn't have any problems growing, despite returning a lot of capital to shareholders, which is a very nice combination for a dividend stock to have.

We Really Like Tesco's Dividend

Overall, a dividend increase is always good, and we think that Tesco is a strong income stock thanks to its track record and growing earnings. Earnings are easily covering distributions, and the company is generating plenty of cash. All of these factors considered, we think this has solid potential as a dividend stock.

It's important to note that companies having a consistent dividend policy will generate greater investor confidence than those having an erratic one. However, there are other things to consider for investors when analysing stock performance. For instance, we've picked out 1 warning sign for Tesco that investors should take into consideration. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.