Dividend Yield Model: Tesco Limited UK

Abstract

The report contains an analysis of dividend yield model of Tesco Limited (UK). The report aims at looking at the performance of Tesco Limited based on its dividends. It was observed that based on the dividend yield analysis. Tesco seems to be performing very poorly. However this is not the case as it had a policy of not distributing dividends in the last few years. Although the dividends are a vital part in analyzing the performance of a company such as Tesco Limited, it is not enough. Further analysis such as ratio analysis is needed so as to paint a clearer picture.

TABLE OF CONTENTS

1.      Terms of reference…………………………………………………………2

2.      Abstract…………………………………………………………………….3

3.      Introduction………………………………………………………………...4

4.      Methods…………………………………………………………………….4

5.      Results……………………………………………………………………...5

6.      Discussion………………………………………………………………….5

7.      Conclusion………………………………………………………………….5

8.      Bibliography………………………………………………………………..7

Introduction

The main aim of the report is to get a deeper understanding and real technical application of financial analysis as it is the aim of (Course/Unit Name). It does this by analyzing whether the shareholders should hold or sell their shares, or buy additional shares. The limitation of the report is that it only looks at the dividends while a lot of other factors contribute to the share price. Other vital information such as the revenues, current economic situation, etc. are not taken into account. Another limitation is that Tesco was paid very little to no dividends in the last three years before 2017 (Sheldon).

Methods

The method used is the dividend discount model which is popularly known as the Gordon Growth Model. For this, we will assume that it will be under a stable model based on the fact that Tesco has been relatively stable over the last few months but has not paid any dividends, however (Dividend Data). As a result of this, the annual growth rate will be zero (Guru Focus). The formula for calculating the stable model is as follows:

Value of stock = Next year expected annual dividend per share divided by the required rate of return less the expected growth rate.

In addition to that, the expected return will be calculated using the capital asset pricing model (Investopedia). The formulae are used to calculate the expected return of an asset. It is calculated as follows.

Expected returns = risk-free rate + Beta (return on the market less risk-free rate)

Results

Tesco beta factor = 0.89 (Financial Times)

Risk free rate = 0.48% (Trading Economics)

Market return = 6.53% (Guru Focus)

Expected return = 0.48% + 0.89(6.53$-0.48$)

                          = 5.8645%

Value of stock if it pays same as last year = 3/ (5.8645-0)

                          = 51.16

Discussion

If we assume that Tesco will be the same dividend as last year’s 3p, then the value of the stock will be 50p which is way lower than the 211.7p that it is currently trading at. Based on this, it will be better for an investor to sale his/her shares. The expected return on Tesco’s Stock is also lower than the market return.

Conclusion

It might seem that Tesco Limited is a company headed for bankruptcy, however, in reality, this is not the case. Tesco is operating in extraordinary times. The last few years it has not been distributing dividends and only introduced it last year. This means that the zero growth rate will be a thing of the past and the dividends will grow drastically based on how it has been doing financially- all signs point to this. This however greatly limits the measurement of the company performance and share price based on the dividends and dividends yield. Sometimes a company will cut down on dividends payments to increase its retained earnings so that it can operate more effectively. Based on this, Tesco unfavorable dividends model analysis is a result of policy and not a sign of failure.

Bibliography

Dividend Data. n.d. 9 March 2018. <www.dividenddata.co.uk./dividend-history.py?epic=TSCO>.

Financial Times. Financial Times. 8 march 2018. 8 march 2018. <markets.ft.com/data/bonds>.

Guru Focus. Guru Focus. 2018. 9 March 2018. <www.gurufocus.com/term/dividend_growth_5y/TSCDY/5-Year-Dividend-Growth-Rate/Tesco%PLC>.

—. Guru Focus. 8 march 2018. 8 march 2018. <www.gurufocus/term/wacc/Tesco%2BPLC>.

Investopedia. Investopedia. n.d. 8 March 2018. <www.investopedia.com/terms/c/capm.as>.

Sheldon, Edward. The Motley Fool. 4 October 2017. 9 march 2018. <www.fool.co.uk/investing/2017/10/04/will-tesco-plc-pay-its-shareholders-a-dividend-this-year/>.

Trading Economics. Trading Economics. 8 March 2018. 8 march 2018. <tradingeconomics.com/united-kingdom/government-bond-yield>.