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I’m always on the lookout for businesses that generate consistent returns, and think now might be a good time to add the UK’s largest retailer to my portfolio to increase passive income.
The stock price goes up
At the time of writing, the Tesco (LSE: TSCO) The share price is 261.5 pence, and it’s down 11% since the start of 2022, but has mostly trended higher since the 2022 AGM in mid-June .
Every little contribution
As a leader of the so-called “Big Four” grocers, it’s not too surprising to see long-term profitability in the underlying financials.
The food seller has recorded net profits of over £1billion in each of the last five years except for Covid-hit 2020 (where profits were still £0.97billion pounds!). Over the same period, revenues have been reliable and predictable at between £57bn and £64bn.
As for profit margins, the numbers are slightly less impressive compared to some FTSE 100 peers. The net profit margin for 2022 was 2.41%, although this was in line with the rival supermarket Sainsbury’s net margin of 2.26% for its 2022 financial year.
Tesco’s dividend yield currently stands at 4.03%, slightly above the FTSE 100 average.
But the key to generating consistent returns over the long term is consistency. And when it comes to dividends, I think it’s fair to say that Tesco has been consistent. It has paid interim and final dividends annually for the past five years. This was after a period of no dividend payments between 2015 and 2016, but its policy currently seems to be to reward shareholders, and that’s good news for my portfolio and my passive income.
With the UK’s cost of living crisis in full swing, Tesco is already seeing an impact on consumer spending. In June he confirmed data from the Office of National Statistics suggesting consumer spending habits are changing, with customers apparently spending less in supermarkets due to inflation.
But I think Tesco is almost uniquely positioned in the retail space to continue to deliver profits and dividends to shareholders.
Tesco is well known for having significant buying power in major food and drink markets, where suppliers know that failure to stock their goods in the UK’s largest supermarket can have consequences important to the viability of their business. This puts Tesco in a strong position to be able to manage costs and maintain margins in any economic environment.
In addition, Tesco has a very diversified portfolio, both in terms of the products sold and in terms of the geographical markets in which it operates. So while it is fair to say that the impact of the UK cost of living crisis will hit Tesco, the fact that it operates in other regions where inflationary factors are different from the UK Uni – and that it stocks many inelastic products that consumers need to buy regardless of price – makes it seem unlikely that sales will drop significantly.
All in all, I think Tesco represents an attractive opportunity to generate passive income in my portfolio. Its consistent financial performance and dividend payout are things I really think I can count on over the next few years. So I’m strongly considering taking a stand.