Tesco PLC (LON:TSCO) sales should continue to outpace the rest of the UK’s big four supermarkets and improved profits will enable a 50% dividend increase in fiscal year 2019-20, according to Deutsche Bank.
Deutsche Bank maintained a ‘buy’ rating on Tesco’s shares but raised its target price to 300p from 250.1p after the retailer posted strong full-year numbers.
READ: Tesco doubles annual dividend as profits surge by a third
Earlier this month, Tesco reported a 28.3% rise in pre-tax profit to £1.67bn for the year to 23 February 2019 after wiping more than £530mln from its cost base and increasing sales by 11.5% to £56.9bn.
Tesco's strategic partnership with Carrefour and the acquisition of wholesaler Booker contributed to the growth.
The group hiked its total dividend for the year to 5.77p, up 92.3% on 2018’s pay-out.
Deutsche Bank sees more upside to Tesco’s shares as “momentum should remain strong, with a better sales dynamic than the other Big 4 in the UK” and further margin improvement.
The investment bank thinks the consensus forecast needs to adjust upward. It raised its own estimates on earnings per share (EPS) for 2020-22 by 11% on lower financial costs and tax rates.
For the current financial year, Deutsche Bank expects pre-tax profit of £2.24bn.
This should drive a 7.8% free cash flow yield for the year, versus 5.3% on average for peers, enabling a 50% dividend increase, the bank said.
Deutsche Bank said the shares trade on 14x 19 price-earnings, about 10% below peers, despite a 14% average EPS compound annual growth rate over the next two years versus 6% for peers.
"Downside risks include 1) a hard Brexit driving significant supply chain disruptions and impacting consumption, 2) the need for greater price investment or failure to deliver efficiencies or synergies to fund these, and 3) foreign exchange or deteriorating macro weighing on international business," Deutsche Bank said.
In late morning trading, shares edged up 0.7% to 251.9p.