Tesco PLC (LON:TSCO) (LSE:TSCO.L) has released a Q3 and Christmas trading update today. Group LFL sales increased by 1.5% in Q3, with UK LFL sales rising by 1.8%. This represents the company’s first market share gain in five years and its 8th consecutive quarter of LFL volume growth. Good performance was also registered in its international segment, with LFL sales growing by 0.6% and building on last year’s strong performance.
In Tesco’s Christmas trading period, its group LFL sales rose by 0.3%. UK LFL sales grew by 0.7%, with food sales up 1.3% and significant outperformance in fresh food. Clothing and Toys also saw higher sales, with them rising by 4.3% and 8.5% respectively. An International LFL sales fall of 1.2% is reflective of a particularly strong seasonal performance in the prior year, as well as lower consumer spending in Thailand.
In my view, Tesco’s update shows that it continues to make progress. Its LFL sales growth over the 19 weeks to 7 January was 1.1%, while total sales increased by 1%. I feel there could be challenges ahead, with inflationary pressures likely to come to the fore. Already, Tesco has sought to absorb these pressures as much as possible, with the price of a typical basket remaining nearly 7% cheaper than in September 2014. However, the price deflation seen in recent years could now be coming to an end.
Tesco currently yields 1.2%, which is lower than popular dividend shares such as Prudential plc (LON:PRU) (LSE:PRU.L)), SSE PLC (LON:SSE) (LSE:SSE.L), Imperial Brands PLC (LON:IMB) (LSE:IMB.L) and HSBC Holdings plc (LON:HSBA) (LSE:HSBA.L). Prudential yields 2.8%, Imperial Brands has a yield of 4.9%, HSBC yields 5.9%, while SSE’s yield stands at 6.1%.
Although Tesco’s yield is much lower than those other companies, its dividend payout ratio is less than 25%. In my view, the combination of improving financial performance as well as a low proportion of EPS paid out as a dividend means that it could become a more appealing dividend share in the long run. As such, I feel it will begin to see greater interest among income investors over the medium term.