The Tesco Plc (LSE:TSCO) share price is off to a good start in 2023, with its market cap rising by almost 10% year to date. The UK stock’s positive momentum comes on the back of encouraging trading results where management reaffirmed their full-year guidance. As such, investors are becoming increasingly optimistic regarding the Tesco dividend forecast for 2023 and beyond.
How are the financials looking in 2023 so far?
As a quick reminder, Tesco is the UK’s leading supermarket giant. While its core business revolves around selling consumer staple goods like food and other necessities, the company has also diversified into other sectors. The list includes Tesco Bank, Tesco Mobile, a food wholesaler enterprise called Booker, and even establishing a network of fuel stations nationwide.
Looking at the group’s latest quarterly results, it seems the retailer successfully capitalised on the Christmas sales. Like-for-like sales came in 6.4% higher, reaching £21.39bn before revenues from Tesco Bank during the 19-week period. And with this momentum looking like it will continue, management guidance now estimates retail operating profit to arrive between £2.4bn and £2.5bn in operating profit with £1.8bn in free cash flow by the end of the year.
That’s good news for income investors as it suggests current analyst expectations for the Tesco dividend forecast are realistic. This is backed even more by the fact that Tesco is holding its ground in market share.
As the cost of living crisis continues to ramp up in the United Kingdom, consumers have switched their shopping routines to key discount retailers such as Aldi, Lidl, and B&M European Value. As such many of the UK’s leading retailers, like Sainsbury’s and Ocado, have been struggling to retain market share. And yet, Tesco continues to hold firm, even growing its market share slightly to 27.5%.
What is the Tesco dividend forecast for 2023 & 2024?
In Tesco’s 2022 fiscal year ending in February, shareholders enjoyed a full-year dividend of 10.9p per share. This level of payout came in ahead of the 9.7p analysts were expecting. And management shortly bolstered shareholder returns even further with the announcement of a £750m share buyback programme on schedule to be completed in April 2023.
| Tesco Historical Dividend | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|
| Dividend Forecast | 2.5p | 4.84p | 7.95p | 10.5p | 9.7p |
| Actual Dividend | 3.0p | 5.77p | 9.15p | 9.15p | 10.9p |
| Beat Expectations? | ✓ | ✓ | ✓ | ⨉ | ✓ |
With the firm’s earnings improving significantly, Tesco’s payout ratio has fallen to roughly 54% – a far more sustainable level than its past performance. And one that indicates the potential for further dividend growth in the future. Needless to say, it’s an encouraging sight for long-term income investors as well as supporting a more substantial Tesco dividend forecast.
| Tesco Dividend Forecast | 2023 | 2024 | 2025 | 2026 | 2027 |
|---|---|---|---|---|---|
| Dividend Forecast | 12.66p | 15.01p | 17.15p | 18.8p | 20.72p |
Looking at Tesco’s track record of exceeding analyst expectations of shareholder payouts, Tesco has proven to be an impressive source of passive income. However, it’s important to remember that forecasts are never a guarantee. However, let’s assume the firm can deliver on expectations. In that case, Tesco’s forward dividend yield based on today’s share price stands at:
- 5.03% in 2023
- 5.96% in 2024
- 6.81% in 2025
- 7.46% in 2026
- 8.23% in 2017
Should I buy Tesco shares for passive income?
Looking at the dividend payout alone, the Tesco share seems like a good buy. In addition to it, Tesco’s dividend forecast also seems promising to investors seeking a steady passive income.
However, what’s concerning is the tough competition within the UK’s grocery retail sector. The rivalry with other sector giants, namely Sainsbury, Morrisons, and Asda, is fierce. Maintaining its leading position is a challenge that can only result from smart strategic decisions taken in time.
So far, management has proven to be quite skilful in navigating the competitive landscape. But there’s never a guarantee that will continue in the future. Even more so today as consumers seek cheaper shopping alternatives. While Tesco’s Aldi price match programme is seeing success in retaining market share, it’s also putting pressure on profit margins. And that could, in turn, lead to more restrictions on future dividend growth.
Tesco dividend forecast: final thoughts
Despite the tough economic and competitive landscape, Tesco has managed to stay ahead of the competition. And this has boded well for the Tesco dividend as well as analyst forecasts. If the cost of living crisis continues to escalate, the group’s profit margins could come under significant additional pressure that may compromise the Tesco dividend in the short term.
However, this isn’t the first time this business has had to weather unfavourable macroeconomic conditions. And with a proven track record of staying ahead of the curve, I remain optimistic about the long-term income potential of this company. That’s why, despite the risks, I am considering adding Tesco shares to my portfolio once I have more capital at hand.
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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.
