Tesco (LSE: TSCO) shares have performed well in 2024, up 18%. However, they have been on a slow decline since September. That makes me wonder if this dip is temporary, and how it might affect shares going forward.
For now, the mild dip doesn’t seem to have finished the company’s dividend plan. This year’s final dividend is expected to be around 13p per share, which is forecast to rise to 15p by 2027.
With that growth, the yield forecast will reach 4.48% by 2026. If that continues, it could rise above 5% by 2027.
That would add to the stock’s already attractive nature as a regular earner.
| Year: | 2023 | 2024 | 2025 | 2026 |
|---|---|---|---|---|
| Dividends per share: | 0.121 | 0.1326 | 0.1437 | 0.1549 |
| Yield forecast: | 4.33% | 3.84% | 4.16% | 4.48% |
Average growth potential
The above forecast assumes that the company can continue to perform well or increase its payout ratio. It managed to do that in 2020 and 2022, and again this year, but growth has been sporadic. Whether or not it can maintain growing dividends will depend on its revenue and profitability.
There seems to be some expectation of steady but moderate growth in those areas.
Revenue is down on average in 2023 but is forecast to grow slightly in the coming years. It is expected to reach around £74bn by 2027, with earnings per share (EPS) expected to rise by 20% to around 33p.
The 12-month average price forecast is £3.99, which is a 15.5% increase from today. However, analysts are not in close agreement, with the best looking at £4.45 and the bearish looking at £2.70.
Anyway, overall good.
Good and bad
Tesco remains one of the UK’s most popular grocery chains, driven by competitive prices and widespread appeal. It offers attractive price matching with its Clubcard membership to compete with more budget chains. Finally, it competes with consumers such as Marks and Spencer too Tesco Finest premium goods.
As inflation puts a strain on the budget this year, its sale The best range enjoyed an impressive 15% growth.
However, there are also factors that may limit growth. The latest UK Budget increase in national insurance (NI) contributions will start next April. With Tesco employing more than 300,000 people, the cost is estimated at £1bn over four years.
It may have to pass these costs on to customers, introducing its own low-cost model and threatening its market share. Of course, this growth will affect all UK businesses but Tesco is particularly exposed due to its size.
An important point
Tesco shares have had a rough ride since Covid but with inflation, things seem to be getting back on track. Steady and moderate growth is the epitome of a defensive stock, providing the potential for consistent and reliable income.
The new budget measures are risky but I don’t see an immediate threat to Tesco shares. I think the stock should be considered for an income portfolio. I increased my position in Tesco this year and will probably do it again in the new year.
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