The income investing potential of Tesco PLC (LON:TSCO) (TSCO.L) could be stronger than many investors realise in my view. Sure, the retailer has a poor track record of paying dividends and faces an uncertain operational outlook. However, I believe that the stock could become a more attractive dividend opportunity over the medium term.
In fact, in the next financial year it is due to pay dividends of 7.5p per share. This puts it on a forward dividend yield of 3.8%. This is just 60 basis points below the FTSE 100’s dividend yield. Since the stock is expected to report a rise in EPS of 19% per annum over the next two years, dividends are expected to be covered 2.2x by profit in the next financial year. This suggests to me that there could be further growth ahead.
Of course, Tesco faces a tough operating environment. The company’s sales and margin growth rate could be hurt to some degree by Brexit, since it seems to be causing shoppers to become increasingly price conscious. This situation could exacerbate over the course of the next few months as the Brexit process moves closer. And it may mean that the retail sector experiences a challenging period.
In spite of this, I remain optimistic about the outlook for the Tesco share price. I feel that it has a sound strategy which could allow it to improve customer loyalty levels while also generating rising margins. Its deal with Carrefour on supply arrangements may boost its competitive advantage and allow it to remain focused on price. And the acquisition of Booker may diversify and improve its financial outlook.
Since the stock has a PEG ratio of around 0.8 following its recent fall, I feel it may have a margin of safety. While potentially volatile and risky, I think its total return prospects could be bright.