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Tesco just raised its dividend by more than 20%. Is it now one of the best UK shares to buy?

Kevin Godbold
·3-min read
A person holding onto a fan of twenty pound notes
A person holding onto a fan of twenty pound notes

The standout figure for me in today’s half-year results report from Tesco (LSE: TSCO) is the almost 21% increase in the interim dividend. With the shareholder payment on the rise, is the stock now one of the best UK shares to buy?

For context, the increase arose because Tesco aims to pay the interim dividend at the rate of 35% of the prior full-year dividend. And the last full-year dividend went up by almost 60%. At first glance, these robust increases in shareholder returns are encouraging to me. I reckon we can judge a lot about the health of a business by the directors’ decisions surrounding dividends.

Why Tesco could be one of the best UK shares to buy

The firm’s policy is to maintain a full-year payout ratio of 50% going forward. And that means the total amount of dividends paid out to shareholders will be 50% of the company’s net income. As such, dividend decisions are automatic in some ways, because if earning slip, so will the dividend.

But today’s increase in the shareholder payment is backed by some convincing figures. At constant currency rates, overall sales rose by almost 7% year on year. But within that figure there’s variation. More than 90% of sales came from operations in the UK and the Republic of Ireland (ROI). Sales rose by 8.5% in those combined regions. But in Central Europe, there was a decline of 1.5% and Tesco’s banking operation saw sales plummet by more than 31%.

Meanwhile, Tesco has been retreating from its international operations. In the report, for example, the company tells us sales of businesses in Thailand, Malaysia and Poland are “progressing well.” Indeed, the core operations remain in the UK and the ROI and Tesco’s turnaround has been powered by refocusing on them.

But the bank’s performance has been abysmal. The figures today reveal a £155m loss from the division. I reckon Tesco is best shot of it. After all, who wants to own a bank these days? They’re terrible, cyclical enterprises quick to get into trouble when economies turn down. And while Tesco is at it, why not get rid of all the other non-core operations abroad? My guess is we’ll see such further disposals in the fullness of time with Tesco becoming completely focused on the British Isles.

I want a lower valuation

I reckon an ongoing intense focus on core operations is what Tesco needs to hold its ground in the war with the big-discounting competition such as Aldi, Lidl and others. Meanwhile, looking ahead, chief executive Ken Murphy said in the report he expects a “broadly even balance” to the year in terms of retail profitability in the first and second halves. And retail operating profit in the current year will likely be “at least” the same level as 2019/20. But he reckons the bank will report a loss between £175m and £200m for the full year.

With the share price near 219p, Tesco’s forward-looking dividend yield is just above 4.2% for the trading year to February 2022. So, is Tesco one of the best UK shares to buy now? Not for me. I want the yield to be at least 5% before buying and see no rush to buy the shares now.

The post Tesco just raised its dividend by more than 20%. Is it now one of the best UK shares to buy? appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Tesco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020