Tesco’s 6pc cash flow vs the rest: Whose dividend is most at chance?

Tesco’s dividend is below threat, but how does it assess to rivals? We crunch the numbers

  Photo: PA

Britain’s most significant supermarket has had a torrid time this 12 months with its shares falling to a 10 12 months reduced. But things could be about to get even worse.

Tesco’s dividend has been known as into question by some analysts, who think the supermarket giant has no different but to reduce payments when it following reviews to the industry on October 1.

Last month Tesco announced the departure of chief executive Phillip Clarke, who will be replaced by Dave Lewis, of Unilever, whose brand names contain Lynx and Dove.

Mr Lewis is anticipated to alter Tesco’s method and compete with the discounters, such as Aldi and Lidl, who are attracting consumers away from the massive supermarket giants.

To fund the change analysts argue Tesco’s only choice is to raid the dividend.

How ‘safe’ is Tesco’s dividend?

There are a handful of measures traders use to assess whether a dividend is beneath threat.

The most extensively utilized is the dividend cover. This figure shows the degree to which the dividend payment is exceeded by the company’s income.

These with a reduced “cover” score are vulnerable as it signifies the organization is paying out out the vast majority, if not all, of its earnings in the form of dividends.

The larger the variety the safer the dividend, with authorities suggesting that a cover of two is fairly safe.

Tesco’s dividend cover more than the previous twelve months is 1.six, which has come down from one.eight in 2013.

Never just check the dividend cover

Ed Croft, of Stockopedia.com, a website that screens shares based mostly on certain criteria, explained when looking in isolation at the dividend cover Tesco’s dividend does not search under risk. But when also factoring in cashflow it is a “entirely distinct story”.

Mr Croft mentioned it is crucial that investors appear at a measure of cashflow per share – as a minimal figure signifies a firm has been paying out out dividend payments with debt. In the situation of Tesco it has a unfavorable cashflow cover, which spells danger for earnings investors.

“If a business has negative cashflow but attempts to maintain its dividend, it may be financing the payout with debt. A cow feeding itself its personal milk is a best setup for a dividend trap,” said Mr Croft.

How does Tesco assess to other supermarkets?

As the table below exhibits Tesco shares looks fairly vulnerable to a reduce when seeking at the dividend cover and its cashflow , in contrast to its five major competitors.

But Morrisons’ dividend appears even a lot more insecure. The company, which has also market share from discount chains, scores the lowest for the two dividend cover and cashflow.

Sainsbury’s sits in the middle of the massive 5, but with a low cashflow score also seems beneath strain.

In contrast Marks &amp Spencer and Walmart, which owns Asda, are in better shape.


Dividend cover (above final twelve months)

Dividend cover (for the subsequent 12 months)

Dividend per share

Free of charge cashflow per share














Marks &amp Spencer












Walmart (owns Asda)



$ one.9

one.9 ($ )


A 5.9pc yield – but what do skilled investors consider?

The fundamental measure of how considerably a business provides back to shareholders every 12 months is the dividend yield, but the crucial as highlighted over is to check this is sustainable.

Going by yield alone Tesco’s 5.9pc seems tempting, but for the vast majority of expert portfolio managers, like Chris White, who manages the Premier Uk Equity Cash flow fund, it is not worth the threat.

“We will not know till at least October if not following 12 months about the direction Tesco is going to consider its firms, so it is difficult to invest today when there is so a lot uncertainty. The dividend is at risk, as nicely as its extended term approach, so I am not buying,” said Mr White.

But Tesco has won more than Alastair Mundy, who manages the Investec Uk Unique Scenarios fund. Mr Mundy, a contrarian investor who tends to bet against the crowd, said the share value is also low-cost to disregard.

“Previously the darling of the sector, Tesco has struggled with its marketplace positioning and regardless of its scale has suffered at the hands of the two the discounters and the a lot more premium supermarket players. With the valuation now a lot more attractive we remain believers that regardless of the quick-term discomfort of a cost war the stock will provide value above the lengthy term,” said Mr Mundy.

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