Executive Summary Introduction -Dividends -Trends & Principals in Financial World Importance of dividend policy for company -Argument

for dividends (current income, future security) -Argument against dividends (taxes, flotation cost) Establishing A Dividend Policy -Distribution & Retention -Dividend payment method -Stock Dividend & Stock Split Factors in setting dividend policy/ Techniques

Study of Given Companies financial Statements -Dividend patterns from last year -Payment method -Policy Adopted -Comparative Analysis Evaluation of performance based on study

Conclusion

Dividends: A payment made out of a firms earnings to its owners, in the form of either cash or stock and as well as any direct payment by the corporation to the shareholders may be considered as a dividend or a part of dividend policy. Dividends came in several different forms. The basic types of cash dividends are: 1. Regular Cash Dividends 2. Extra Dividends 3. Special Dividends 4. Liquidating Dividends. Regular Cash Dividends: These are the cash payments made directly by the firms owner to the shareholders in the normal course of business usually made four times a year. Extra Dividends: Extra stands as to be a part of the payment management is indicating that the extra part may or may not be repeated in the future. Special Dividends: These dividends are viewed as a truly unusual or one-time event & wont be repeated. Liquidating ratio: It represents that some or all of the business has been liquidated, that is sold off. However, a cash dividend payment reduces corporate cash & retained earnings, expect in case of liquidating dividend( which may reduce paid in capital).

Factors:

When setting up your dividend policy, key decisions will be how frequently to pay out, what percentage of profit to distribute among stockholders, and whether you will offer them other options, such as stocks in lieu of cash. Once the policy is in place, it needs to be communicated clearly to all stockholders so that they know how often and in what form dividends will be distributed. Policies can always be amended. For example, if the companys profits are badly hit one year, the board may decide not to pay dividends but to reinvest all the profit in the hope of better subsequent profits.

It is usual to publish the policy as a distinct corporate document for distribution in printed form. Many companies also publish the dividend policy on their websites. Amendments to the policy should be distributed in the same way.

Importance of Dividends Policy:

Arguments against Dividends First, some financial analysts feel that the consideration of a dividend policy is irrelevant because investors have the ability to create "homemade" dividends. These analysts claim that this income is achieved by individuals adjusting their personal portfolios to reflect their own preferences. For example, investors looking for a steady stream of income are more likely to invest in bonds (in which interest payments don't change), rather than a dividend-paying stock (in which value can fluctuate). Because their interest payments won't change, those who own bonds don't care about a particular company's dividend policy. The second argument claims that little to no dividend payout is more favorable for investors. Supporters of this policy point out that taxation on a dividend is higher than on a capital gain. The argument against dividends is based on the belief that a firm that reinvests funds (rather than paying them out as dividends) will increase the value of the firm as a whole and consequently increase the market value of the stock. According to the proponents of the no dividend policy, a company's alternatives to paying out excess cash as dividends are the following: undertaking more projects, repurchasing the company's own shares, acquiring new companies and profitable assets, and reinvesting in financial assets. (Keep reading about capital gains in Tax Effects On Capital Gains.) Arguments For Dividends In opposition to these two arguments is the idea that a high dividend payout is important for investors because dividends provide certainty about the company's financial well-being; dividends are also attractive for investors looking to secure current income. In addition, there are many examples of how the decrease and increase of a dividend distribution can affect the price of a security. Companies that have a long-standing history of stable dividend payouts would be negatively affected by lowering or omitting dividend distributions; these companies would be positively affected by increasing dividend payouts or making additional payouts of the same dividends. Furthermore, companies without a dividend history are generally viewed favorably when they declare new dividends. (For more, see Dividends Still Look Good After All These Years.)

Dividend-Paying Methods/Policies Now, should the company decide to follow either the high or low dividend method, it would use one of three main approaches: residual, stability, or a hybrid compromise between the two. Residual Companies using the residual dividend policy choose to rely on internally generated equity to finance any new projects. As a result, dividend payments can come out of the residual or leftover equity only after all project capital requirements are met. These companies usually attempt to maintain balance in their debt/equity ratios before making any dividend distributions, which demonstrates that they decide on dividends only if there is enough money left over after all operating and expansion expenses are met. For example, let's suppose that a company named CBC has recently earned $1,000 and has a strict policy to

maintain a debt/equity ratio of 0.5 (one part debt to every two parts of equity). Now, suppose this company has a project with a capital requirement of $900. In order to maintain the debt/equity ratio of 0.5, CBC would have to pay for one-third of this project by using debt ($300) and two-thirds ($600) by using equity. In other words, the company would have to borrow $300 and use $600 of its equity to maintain the 0.5 ratio, leaving a residual amount of $400 ($1,000 - $600) for dividends. On the other hand, if the project had a capital requirement of $1,500, the debt requirement would be $500 and the equity requirement would be $1,000, leaving zero ($1,000 $1,000) for dividends. If any project required an equity portion that was greater than the company's available levels, the company would issue new stock. Stability The fluctuation of dividends created by the residual policy significantly contrasts with the certainty of the dividend stability policy. With the stability policy, companies may choose a cyclical policy that sets dividends at a fixed fraction of quarterly earnings, or it may choose a stable policy whereby quarterly dividends are set at a fraction of yearly earnings. In either case, the aim of the dividend stability policy is to reduce uncertainty for investors and to provide them with income. It may not always realated to the earning of the company: Dividend Practices: -Constant dividend per share -Constant percentage of net earnings -Small constant dividend per share plus

Hybrid The final approach is a combination between the residual and stable dividend policy. Using this approach, companies tend to view the debt/equity ratio as a long-term rather than a short-term goal. In today's markets, this approach is commonly used by companies that pay dividends. As these companies will generally experience business cycle fluctuations, they will generally have one set dividend, which is set as a relatively small portion of yearly income and can be easily maintained. On top of this set dividend, these companies will offer another extra dividend paid only when income exceeds general levels.

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Importance: Investors like Dividends

The attitude of investors is an important factor to be considered. Consistently increasing dividends are generally welcomed by investors as indicators of profitability and safety. Uncertainty is increased by lack of dividends or dividends that fluctuate widely. Grigoli (1986) agrees with this conclusion: Because investors value stable dividends, it may not be in a corporations best interests to raise dividends to unsustainable levels. 4

Dividends are thought to have an information content; that is, an increase in dividends means that the board of directors expects the firm to do well in the future. This signaling effect might favorably affect the firms common stock price. On the other hand, if income expectations do not justify the optimism, the indication of a more positive future than is justified by the facts is not likely to lead to a favorable outcome.

Another important reason for the payment of dividends is that a wide range of investors need the dividends for consumption purposes. Although such investors could sell a portion of their holdings, this latter transaction has relatively high processing costs compared with cashing a dividend check. The presence of investors desiring cash for consumption makes it difficult to change the current dividend policy. One group of investors may benefit from a change in dividend policy, but another group may be harmed. Although we see that income taxes paid by investors tend to make a retention policy more desirable than cash dividends, the presence in the real world of zero tax and low tax investors needing cash dictates that we consider each situation individually and be flexible in arriving at a dividend policy.

There are stockholders who desire cash. A dividend supplies cash without the investor incurring brokerage expense. If cash is retained by the corporation, the stockholders wanting liquidity will have to sell a fraction of their holdings to obtain cash, and this process will result in brokerage fees. Retired individuals living off their dividends and tax-free universities are apt to prefer dividend-paying corporations to corporations retaining income. While a 100% earnings payout cash dividend has the advantage of giving cash to those investors who desire cash, the policy also results in cash being given to those investors who do not desire cash, and who must incur brokerage fees to reinvest the dividends, and who pay taxes.

Dividend Policy: Dividend is apart of profits distributed among the shareholders. The basic question before the Board of directors is how much profits should be divided among shareholders as dividend and how much to be retained in the business as reserves to meet the future contingencies and for expansion of business. Both-future expansion and distribution of dividend are desirable but in conflict. Hence, allocation of earnings between dividends and retained earnings is an essential part of management functions, it requires a sound dividend policy to be followed by the corporation According to Weston and Brigham Dividend policy determines the division of earnings between payments to shareholders and retained earnings. In this connection, the dividend declared during previous years may be taken as a base and the same rate is followed in the coming years. Generally, Board of Directors aim at maintaining the dividend rate which we may call a Stable Dividend Policy. For its purpose a 'dividend equalization fund' is created out of profits to equalize the profits of the coming years.

Factors Affecting Dividend Policy A number of considerations affect the dividend policy of company. The major factors are 1. Stability of Earnings. The nature of business has an important bearing on the dividend policy. Industrial units having stability of earnings may formulate a more consistent dividend policy than those having an uneven flow of incomes because they can predict easily their savings and earnings. Usually, enterprises dealing in necessities suffer less from oscillating earnings than those dealing in luxuries or fancy goods. 2. Age of corporation. Age of the corporation counts much in deciding the dividend policy. A newly established company may require much of its earnings for expansion and plant improvement and may adopt a rigid dividend policy while, on the other hand, an older company can formulate a clear cut and more consistent policy regarding dividend. 3. Liquidity of Funds. Availability of cash and sound financial position is also an important factor in dividend decisions. A dividend represents a cash outflow, the greater the funds and the liquidity of the firm the better the ability to pay dividend. The liquidity of a firm depends very much on the investment and financial decisions of the firm which in turn determines the rate of expansion and the manner of financing. If cash position is weak, stock dividend will be distributed and if cash position is good, company can distribute the cash dividend. 4. Extent of share Distribution. Nature of ownership also affects the dividend decisions. A closely held company is likely to get the assent of the shareholders for the suspension of dividend or for following a conservative dividend policy. On the other hand, a company having a good number of shareholders widely distributed and forming low or medium income group, would face a great difficulty in securing such assent because they will emphasise to distribute higher dividend. 5. Needs for Additional Capital. Companiesretain a part of their profits for strengthening their financial position. The income may be conserved for meeting the increased requirements of working capital or of future expansion. Small companies usually find difficulties in raising finance for their needs of increased working capital for expansion programmes. They having no other alternative, use their ploughed back profits. Thus, such Companies distribute dividend at low rates and retain a big part of profits. 6. Trade Cycles. Businesscycles also exercise influence upon dividend Policy. Dividend policy is adjusted according to the business oscillations. During the boom, prudent management creates food reserves for contingencies which follow the inflationary period. Higher rates of dividend can be used as a tool for marketing the securities in an otherwise depressed market. The financial solvency can be proved and maintained by the companies in dull years if the adequate reserves have been built up. 7. Government Policies. The earnings capacity of the enterprise is widely affected by the change in fiscal, industrial, labour, control and other government policies. Sometimes government restricts the distribution of dividend beyond a certain percentage in a particular industry or in all spheres of business activity as was done in emergency. The dividend policy has to be modified or formulated accordingly in those enterprises. 8. Taxation Policy. High taxation reduces the earnings of he companies and consequently the rate of dividend is lowered down. Sometimes government levies dividend-tax of distribution of dividend beyond a certain limit. It also affects the capital formation. N India, dividends beyond 10 % of paid-up capital are subject to dividend tax at 7.5 %. 9. Legal Requirements. In deciding on the dividend, the directors take the legal requirements too into consideration. In order to protect the interests of creditors an outsiders, the companies Act 1956 prescribes certain guidelines in respect of the distribution and payment of dividend. Moreover, a company is required to provide for depreciation on its fixed and tangible assets before declaring dividend on shares. It proposes that Dividend should not be distributed out of capita, in any case. Likewise, contractual obligation should also be fulfilled, for example, payment of dividend on preference shares in priority over ordinary dividend.

10. Past dividend Rates. While formulating the Dividend Policy, the directors must keep in mind the dividend paid in past years. The current rate should be around the average past rat. If it has been abnormally increased the shares will be subjected to speculation. In a new concern, the company should consider the dividend policy of the rival organisation. 11. Ability to Borrow. Well established and large firms have better access to the capital market than the new Companies and may borrow funds from the external sources if there arises any need. Such Companies may have a better dividend pay-out ratio. Whereas smaller firms have to depend on their internal sources and therefore they will have to built up good reserves by reducing the dividend pay out ratio for meeting any obligation requiring heavy funds. 12. Policy of Control. Policy of control is another determining factor is so far as dividends are concerned. If the directors want to have control on company, they would not like to add new shareholders and therefore, declare a dividend at low rate. Because by adding new shareholders they fear dilution of control and diversion of policies and programmes of the existing management. So they prefer to meet the needs through retained earing. If the directors do not bother about the control of affairs they will follow a liberal dividend policy. Thus control is an influencing factor in framing the dividend policy. 13. Repayments of Loan. A company having loan indebtedness are vowed to a high rate of retention earnings, unless one other arrangements are made for the redemption of debt on maturity. It will naturally lower down the rate of dividend. Sometimes, the lenders (mostly institutional lenders) put restrictions on the dividend distribution still such time their loan is outstanding. Formal loan contracts generally provide a certain standard of liquidity and solvency to be maintained. Management is bound to hour such restrictions and to limit the rate of dividend payout. 14. Time for Payment of Dividend. When should the dividend be paid is another consideration. Payment of dividend means outflow of cash. It is, therefore, desirable to distribute dividend at a time when is least needed by the company because there are peak times as well as lean periods of expenditure. Wise management should plan the payment of dividend in such a manner that there is no cash outflow at a time when the undertaking is already in need of urgent finances. 15. Regularity and stability in Dividend Payment. Dividends should be paid regularly because each investor is interested in the regular payment of dividend. The management should, inspite of regular payment of dividend, consider that the rate of dividend should be all the most constant. For this purpose sometimes companies maintain dividend equalization Fund. Stability of Dividend There may be three types of dividend policy (1) Strict or Conservative dividend Policy which envisages the retention of profits on the cost of dividend pay-out. It helps in strengthening the financial position of the company; (2) Lenient Dividend Policy which views the payment of dividend at the maximum rate possible taking in view the current earing of the company. Under such policy company retains the minimum possible earnings; (3) Stable Dividend Policy suggests a mid-way of the above two views. Under this policy, stable or almost stable rate of dividend is maintained. Company maintains reserves in the years of prosperity and uses them in paying dividend in lean year. If company follows stable dividend policy, the market price of tis shares shall be higher. There are reasons why investors prefer stable dividend policy. Main reasons are:1. Confidence Among Shareholders. A regular and stable dividend payment may serve to resolve uncertainty in the minds of shareholders. The company resorts not to cut the dividend rate even if its profits are lower. It maintains the rate of dividends by appropriating the funds from its reserves. Stable dividend presents a bright future of the company and thus gains the confidence of the shareholders an the goodwill of the company increases in the eyes of the general investors. 2. Income Conscious Investors. The second factor favoring stable dividend policy is

that some investors are income conscious and favor a stable rate of dividend. They too, never favour an unstable rte of dividend. A Stable dividend policy may also satisfy such investors.

3. Stability in Market Price of Shares. Other things beings equal, the market price very with the rate of dividend the company declares on its equity shares. The value of shares of a company having a stable dividend policy fluctuates not widely even if the earnings of the company turn down. Thus, this policy buffer the market price of the stock. 4. Encouragement to Institutional Investors. A stable dividend policy attracts investments from institutional investors such institutional investors generally prepare a list of securities, mainly incorporating the securities of the companies having stable dividend policy in which they invest their surpluses or their long term funds such as pensions or provident funds etc. In this way, stability and regularity of dividends not only affects the market price of shares but also increases the general credit of the company that pays the company in the long run.

(2) http://www.freemba.in/articlesread.php?artcode=489&stcode=10&substcode=30
Different types of Dividend Dividend may be of different types. It can be classified according to the mode of its distribution as follows

(1) Regular Dividend. By dividend we mean regular dividend paid annually, proposed by the board of directors and approved by the shareholders in general meeting. It is also known as final dividend because it is usually paid after the finalization of accounts. It sis generally paid in cash as a percentage of paid up capital, say 10 % or 15 % of the capital. Sometimes, it is paid per share. No dividend is paid on calls in advance or calls in arrears. The company is, however, authorised to make provisions in the Articles prohibiting the payment of dividend on shares having calls in arrears. (2) Interim Dividend. If Articles so permit, the directors may decide to pay dividend at any time between the two Annual General Meeting before finalizing the accounts. It is generally declared and paid when company has earned heavy profits or abnormal profits during the year and directors which to pay the profits to shareholders. Such payment of dividend in between the two Annual General meetings before finalizing the accounts is called Interim Dividend. No Interim Dividend can be declared or paid unless depreciation for the full year (not proportionately) has been provided for. It is, thus,, an extra dividend paid during the year requiring no need of approval of the Annual General Meeting. It is paid in cash. (3) Stock-Dividend. Companies, not having good cash position, generally pay dividend in the form of shares by capitalizing the profits of current year and of past years. Such shares are issued instead of paying dividend in cash and called 'Bonus Shares'. Basically there is no change in the equity of shareholders. Certain guidelines have been used by the company Law Board in respect of Bonus Shares. (4) Scrip Dividend/debentures. Scrip dividends are used when earnings justify a dividend, but the cash position of the company is temporarily weak. So, shareholders are issued shares and debentures of other companies. Such payment of dividend is called Scrip Dividend. Shareholders generally do not like such dividend because the shares or

debentures, so paid are worthless for the shareholders as directors would use only such investment is which were not . Such dividend was allowed before passing of the Companies (Amendment) Act 1960, but thereafter this unhealthy practice was stopped. (5) Bond Dividends. In rare instances, dividends are paid in the form of debentures or bounds or notes for a long-term period. The effect of such dividend is the same as that of paying dividend in scrips. The shareholders become the secured creditors are the bonds has a lien on assets. (6) Property Dividend. Sometimes, dividend is paid in the form of asset instead of payment of dividend in cash. The distribution of dividend is made whenever the asset is no longer required in the business such as investment or stock of finished goods. (7) Stock Split is ways in which a firm can lower or raise the price of its stock by adjusting the number of share belonging to each shareholder. (8)Stock Repurchases are purchasing by firms of outstanding shares of their own common stock in the market place.

Analyse Company Dividend Policy: TESCO Tesco operates multiple retail formats in 14 different countries & rank among the top three grocery retailers in the world with US walmart & Frances Carrefour holding top slots. TESCO is the leading food retailer in the united kingdom, where it operates about 2500 of its nearly 4900 stores worldwide. It holds more than 30% share of the UK grocery market, substantially more than walmart , in its home market. Tesco has also expanded into the non-food market through hypermarkets & online operations. In comparison to its homegrown competitors such as Sainsbury, Morrison, M&S and Waitrose, all with no or hardly any activities abroad, Tesco is becoming an increasingly international business. Tescos non-UK sales recently surpassed one-third of total group revenues for the first time. The group has a large presence in many Eastern European countries and parts of Asia. Tesco entered the US market in late 2006. In particular Tescos already vast operation throughout Asia Pacific is starting to deliver profits for the group despite China not yet breaking even. Former international head Philip Clarke replaces Sir Terry Leahy in March, and he will no doubt be looking to the rapid economic growth and favourable demographic trends in the Far East. Despite successes on the international front, Tesco still generates more than half of its overall sales and around 80% of its retail operating profits in the UK. In the current economic environment in the UK it faces continued difficulty and uncertainty. The company had been losing market share to both price discounters such as Aldi and Lidl as well as peers like Asda (owned by WalMart) and Wm Morrison Plc. Food cost inflation and the increase in the value-added tax should weigh on near-term results in the UK, while saturation and pressures from regulators may limit UK growth over the longer term, despite gains from other businesses like Tesco Direct and Tesco Bank. Since growth at home will probably be strained for some time, Tescos future will increasingly be defined by its ongoing global expansion. International operations provide already more than half of its growth, and the group has invested heavily in recent years, using internal funds, new debt, and property sales/leasebacks to boost capital expenditure. Globally, competition is intense in foreign markets from domestic local chains and other large international retailers such as Wal-Mart and Carrefour.

Over the last 12 years Tescos share price has gone up more than two-fold. Tescos long-term share price development is clearly trending upwards with the occasional spike downward as well as upwards.

Earnings per Share

I am only interested in companies that have growing earnings per share (EPS). In general, a company that cannot increase its EPS over time will not be able to sustain the growth in its dividend payments to shareholders. EPS=Net Income/Total Number of Shares Outstanding Normally, I look for an increase in the EPS over the past ten years.

Tesco has managed to deliver an 11.89% average annual increase in its EPS between 1998

and 2010 (year end: February 2010). For 2010/2011 Tesco is expected to earn 0.327 pershare, followed by 0.365 in 2011/2012.

Return on Equity
Return on Equity is calculated by dividing the total amount of net income for a given year over the amount of owners equity on the balance sheet at the end of the previous period. This shows how efficiently a company uses its money. A consistently high return on equity is a good indication that the companys management not only can make money from the existing business but also can profitably employ retained earnings to make more money. A very high rate of return on equity often indicates that the company benefits from possessing some very strong position in the market, often some form of (near) monopoly. High quality companies will consistently earn high returns on shareholders equity. I am looking for a minimum ROE of around 17% over time. A higher ROE is even better. I would be concerned to see a decreasing trending ROE over time.

Tescos Return on Equity has firmly remained between 17% and 20%, never nearing Walmarts 20%+, though. Rather than focus on absolute values for this indicator, I generally want to see at least a consistently high and stable return on equity over time.

Dividend per Share

Dividend growth is the hallmark of a high quality company. A company that is making profitable progress should be able to boost its dividend at least five times in a 12year period. In general, I found an uninterrupted growth in dividends every year for more than seven years, preferably ten.

Tesco is the only FTSE100 company with an unbroken 26 years track record of dividend increases. In 2006, Tesco declared a new dividend policy confirming that dividends will increase broadly in line with its earnings per share growth rate. Annual dividends (total dividends paid during the calendar year) have increased by an average of 10.68% per annum since 1998, which is lower than the growth in EPS (11.89%). The disparity is mostly due to a gradual decrease in the dividend payout ratio. An 11% growth in dividends translates into the dividend payment doubling almost every 6 years. If we look at historical data, going as far back as 1990, Tesco has actually managed to double its dividend payment every 6 years on average. Tesco is an example of a company that has kept paying dividends while enjoying strong double-digit earnings growth for several decades. Over the last twenty, fifteen, ten and five years Tescos annualised dividend growth rate has been relatively stable, averaging 11.38 per cent, whereas the last three years the annualised dividend growth rate has decreased somewhat to still a very respectful 10.64 per cent. Despite stock analysts expectations for average annual EPS growth of 11.7% over the next two years, Im unsure whether this is sustainable in the current market conditions. As well as, whether Tesco will be able to repeat double-digit dividend growth during the next decade. However, a near double-digit dividend growth rate certainly isnt out of the question. And thats still good for me.

Earnings Payout Ratio

Calculated by dividing dividends per share by earnings per share. If this ratio is over 100%, it means the company paid out more in dividends than it made in profits and thats clearly not sustainable long term.

For lower-yielding shares in the 2-4% range, such as Tesco, ideally we would want to see payout ratios below 60%. For higher-yielding shares (4-7%), wed look for less than 85%.

Dividend Payout Ratio

Calculate the Dividend Payout Ratio by dividing the DPS over the EPS. generally looking for a DPR that is below 50% in most companies. However, if a company has been able to maintain a higher DPR over time due to the nature of its business or the nature of its legal structure, I would consider buying shares with a much higher DPR. A rising DPR, or even worse a DPR that moves for irrational reasons, is generally a red flag for me. A rising DPR shows me that there is not much room for future dividend growth. In addition, shares, which have an unusual high DPR, may indicate a higher risk for dividend cuts.

Tescos dividend payout ratio has been gradually declining below my 50% threshold. In general, a lower payout is always a plus, since it leaves room for consistent dividend growth minimising the impact of short-term fluctuations in earnings. Dividend cover remains comfortably above 2.

Valuation
After having analysed the reliability of the trends of EPS, ROE, DPR and DPS I assume thatthese would continue as is for the foreseeable future. I then focus on

specific valuationparameters in order to ascertain when a share is historically undervalued and overvalued. Here is Tescos value chart. A larger version is appended at the end of this report.

1990 is the base year we used to calculate the various dividend and value metrics. The Tesco value chart has two major horizontal lines. The top line (red) represents a 2.1% dividend yield, where the share is overvalued and a sale should be considered. The solid line at the bottom (green) represents a 3.9% dividend yield, where the share price of Tesco is undervalued and a purchase should be considered. Its apparent that when Tescos dividend yield moves above the red overvalue yield line or below the green undervalue yield line, a reversal in the share price trend takes place.

Tescos Dividend Yield Metrics

Tescos current low-price/high-yield undervalue area (LoPr) is at a share price of 3.71. The high-price/low-yield overvalue area (HiPr) is at 7.04 per share. Tescos closing share price (Price) on 4 February 2011 was 4.025 per share We have used 1990 as the base year (Year) for our calculations. Stock analysts* have estimated the total annual dividend pay-out (Div) during 2011 to be 14.51

pence as of 4th February 2011. This equals a conservative 7.25% dividend increase in comparison to the 2010 payout of 13.53 pence. On the basis of the above, we believe that Tesco is not overvalued at these levels. Instead Tescos share price is still within 10% (% Down), or 7.8% to be exact, to its historically undervalued share price and so warrants an immediate purchase. Tescos truly historic undervalued periods have covered only several months in 2003 and most recently during early 2009.

Verdict
Tesco isnt going away for a very long time, in particular due to its intriguing continued international expansion in many potential high growth markets. Tesco is a great company. A UK success story! Tesco has a great dividend track record increasing annually by 10%. Although for 2011, stock analysts are estimating Tescos total dividend pay-out to increase by just 7.25%. Getting good investment returns is about more than buying great companies. To secure the best returns long-term, one has to buy great dividend paying companies at low prices i.e. when they are:

On that basis, I would consider purchasing shares in Tesco on any dips below 4.08, which is the 10% undervalued margin. As a result, we will issue a buy order for 735 shares at a limit price of 4.08 per share.

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