When combined with a lacklustre share price performance over recent months, this means that the firm currently yields 4.2pc. This is 50 basis points higher than the FTSE 100 index’s dividend yield.
Crucially, Tesco’s dividend was covered 1.9 times by profits in its latest financial year. This shows it has sufficient headroom when making dividend payments, which could prove useful as ongoing economic uncertainty continues.
It also means that a large proportion of future profit growth could be passed onto investors via higher shareholder payouts, thereby providing scope for further real-terms dividend growth over the coming years.
The company’s annual results also highlighted its improving competitive position. Its market share in the UK increased in both value and volume terms, with customer satisfaction metrics continuing to strengthen.
Consumers in the UK are likely to become less price conscious as inflation falls, interest rates are cut and the economy’s performance improves.
This should not only support sales growth across the retail sector, but provide opportunities for margin expansion that have a positive impact on profits and dividends.
In the meantime, the firm’s net interest cover in excess of five shows it has ample headroom when servicing debt. The planned sale of its banking operations to Barclays further strengthens its balance sheet and allows for greater focus on its core operations.
It also provides additional capital that is set to be used to fund further share buybacks over the coming months.
Having fallen by 1pc since the start of the year, Tesco’s share price currently offers good value for money on a long-term view. It trades on a price-to-earnings ratio of just 12.4, which suggests that it offers a wide margin of safety and scope for significant capital growth to complement its generous income return as operating conditions improve.