Should I buy Tesco shares for rising passive income?

Tesco (LSE: TSCO) became Britain’s most popular supermarket in the mid-1990s and has remained so ever since. But does this dominance make stocks a good candidate for reliable passive income payouts and growth? Let’s have a look.

Adaptability

One of the things I admire about Tesco is its adaptability. It has maintained its leading position by constantly adjusting to consumer trends, through home delivery or the new ‘Aldi Price Match’ campaign.

Sir Terry Leahy, the supermarket’s chief executive from 1997 to 2011, thinks that the introduction of the Tesco Clubcard in 1995 was the moment that defined the company’s long-term success.

Although not a pioneer of loyalty schemes, Tesco uses technological advances to collect raw data on what shoppers buy. Then be in a position to offer special gifts and discounts to keep your customers coming back.

Today, more than 20 million people in the UK have a Tesco Clubcard. I believe this scheme gives it a competitive edge, thus displacing the dreaded German discount brands.

Performance

The change in the price of TESCO shares for the last years is +1.8%.

Now, I think there are two ways to look at this performance. The glass is half empty, I can say the stock price is gone and it’s an investment worth making.

However, seen from another perspective, I can argue that this stability will preserve the invested capital, so that I can generate dividends.

Personally, if the company’s progressive dividend policy bears fruit, I tend to adopt the latter interpretation. And since reinstating its dividend in 2017 following an accounting scandal, Tesco has a good record of paying out.

Fiscal year (up to February)	Total dividend per share
2022/23	10.76p (estimated)
2021/22	10.90 p.m
2020/21	60.08p (including special dividend)
2019/20	9.15 p.m
2018/19	5.77 p
2017/18	3.00 p.m

But all that is in the past. So what does the future hold?

Well, hopefully, Tesco is guiding for FY22/23 retail operating profit of between £2.4bn and £2.5bn. And it expects retail free cash flow of at least £1.8bn.

I think this figure is impressive, considering how soaring inflation has caused problems with its operations. This shows that the company is well positioned to continue rewarding investors.

The dividend yield at 264p per share is 4.4%. That is comfortably above the 3.7% average yield now there by FTSE 100. And reassuringly guaranteed almost twice by earnings.

Even better, if analysts’ forecasts are met, supermarket profits will rise by just over 5% next year.

Should I buy Tesco shares?

Tesco faces other competitors that go beyond discounting. Amazon keep moving deeper into the grocery store. In addition, small companies such as HelloFreshmeal-kit shipper, offers a unique proposition that can draw people away from corporate superstores.

I don’t expect Tesco to let go of its market-leading position. But I fear that this relentless competition will put pressure on profits. And I think this could ultimately limit our ability to grow our profits significantly next year.

So, I think there are better income stocks for my portfolio. I will be looking at buying them instead.