Having paid a dividend of 3p per share last year, Tesco PLC (LON:TSCO) (TSCO.L) may not appear to offer an impressive income outlook. After all, it equated to a dividend yield of around 1.5%.
However, the company’s financial performance is forecast to improve significantly over the medium term. Its EPS is expected to rise by 16% this year and then by 22% in the 2019 fiscal year.
Both of these growth rates are impressive relative to its supermarket rivals. They are at least partly down to the company’s focus on efficiency and improving its customer service metrics. In both of these areas the business has made progress in my view, with it on target to generate an operating margin of 4% next year.
This could mean that Tesco’s dividend payments increase at a relatively fast pace. In fact, the company is expected to pay a dividend of 7.2p per share next year. This would represent a rise of 140% on last year’s level, and this could help to improve its income appeal in the eyes of many investors.
If it is able to deliver dividend growth as per expectations next year, the stock would have a dividend yield of 3%. Since its dividend payout ratio is expected to be 44.4% next year, it seems as though it is sustainable and could allow for further reinvestment over the medium term.
As a result, I feel that Tesco has income investing appeal for the long term. The company has been able to improve its efficiency and with its financial performance expected to be boosted over the next couple of years, a significantly higher dividend seems affordable.
Sure, the retail sector continues to have an uncertain future. But in my eyes the company continues to have the potential to generate a high total return due to its strategy and the strength of its management team.