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A good few investors have Tesco (LSE: TSCO) shares in their long-term income portfolios, and for good reason. It’s the clear sector leader with 28% of the UK groceries business, according to the latest Kantar update.
But as a first step when looking for passive income shares, I like to compare against five key criteria. So how does Tesco rate?
Check 1: dividend
With April’s 2024-25 full-year results Tesco announced a 13.7p dividend. That’s a 3.6% yield, which isn’t huge but is in line with the long-term FTSE 100 average. And it was 13% more than the previous year’s.
In the year, Tesco paid £864m in dividends. But since October 2021 the company has also returned £2.8bn in share buybacks. That bodes well for the future of per-share dividend payments.
While there are much bigger dividends out there, I give Tesco a tick on check #1.
Check 2: cover
I’ve seen plenty of companies over the years paying dividends that weren’t covered by earnings. But that’s not sustainable forever and they can come to a sticky end.
In this case though, there’s no such problem. For the year just ended, Tesco recorded adjusted diluted earnings per share (EPS) of 27.4p, which covered the dividend 2.26 times.
The company described its dividend policy as “broadly targeting a 50% payout of adjusted earnings per share.” That’s an easy pass on #2.
Check 3: history
Tesco hit a tough patch around 2012/13. Rapid expansion had left it financially overstretched and earnings took a bit hit. The dividend initially held steady but was suspended in 2015/16.
And although progressive dividends have resumed, they’re still not back as high as the 14.76p peak hit just before the slump.
There’s a positive take from this. Tesco faced its problems and fixed them. And I don’t see the current management repeating the same mistakes. But the dividend cancellation and restart means I have to fail it on check #3.
Check 4: forecasts
Forecasts can be risky to rely on. They often just seem to assume more of the same, whatever that is. And they can be the last to foresee negative changes coming.
Saying that, they predict EPS will rise around 35% over the next three years, with the dividend lifting 21% over the same period. Even with the necessary caution so tesco passes check #4.
Check 5: debt
Finally, debt can be a big dividend killer should a company hit hard times. When cash is short and debt repayments get tough, the dividend can be the first to go.
As of February 2025 Tesco had net debt of £9.45bn. And I’d really like to see it falling rather than rising as forecasts suggest. Still, this is a company with sales of £63.6bn last year and a market cap of £25.2bn. The debt seems easily manageable, which means a #5 tick.
Verdict
I see share price risk as we hit a period of intense price competition, especially after such a strong five-year run. And these checks don’t look at valuation measures, which is essential before I’d buy any stock. But Tesco gets a four out of five thumbs-up on this checklist, making it a clear one for passive income consideration, I feel.
