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3 Ways Marks and Spencer Group Plc Will Continue To Lag Its Sector

Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.

Today I’m looking at Marks and Spencer (LSE: MKS) (NASDAQOTH: MAKSY.US).

Valuation

Let’s start with the basics, M&S’ valuation in relation to that of its closest peers and the wider sector. Currently, M&S trades at a historic P/E ratio of 15.3. In comparison, M&S’ closest sector peers, Next (LSE: NXT) and Kingfisher (LSE: KGF) trade at a historic P/E of 18.4 and 17.3 respectively.

What’s more, the general retailers sector currently trades at an average P/E of 17.5, which makes M&S look cheap compared to both its peers and the wider sector.

That said, it would appear that M&S deserves this low valuation, as according to City analysts, the company’s earnings are only expected to expand a minuscule 2% year. 

Company’s performance

Nonetheless, M&S is the second most valuable retail brand in the UK after Tesco. However, despite its prominence in the UK’s retail landscape, M&S’ growth has been unimpressive during the last five years. Indeed, since 2009 M&S earnings have only expanded 17%, around 3% a year.

In comparison, both of M&S’ close peers, Kingfisher and Next have managed to double their earnings during the past five years. In addition, City analysts are currently forecasting that both Next and Kingfisher will grow much faster than M&S during the next two years.

For example, thanks to a combination of share buybacks and multi-channel growth, City analysts estimate that Next’s earnings per share will expand 17% this year. Kingfisher’s growth is expected to be slower however, City analysts predict earnings growth of only 5% for this year.

Dividends

Having said all of that, M&S holds its own on the dividend front. At present, the company offers investors a 3.4% dividend yield, above the general retailers sector average of 2.3%.

Furthermore, this dividend yield is stronger than the offerings from Next and Kingfisher, which currently stand at 1.9% and 2.5% respectively.  

That said, although Next’s dividend yield is below average, the company is highly cash generative and is returning this cash to investors by buying back stock. Indeed, Next’s management has stated that it has returned £295 million to investors already this year through this method. A buyback of £295 million indicates that the company retired 3.5% of its outstanding shares. 

Foolish summary

So overall, while M&S is one of the most valuable retail brands within the UK the company is struggling for growth. Moreover, the company’s closest sector peers are growing rapidly, which leads me to conclude that Marks and Spencer is a much weaker share than its peers. 

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> Rupert does not own any share mentioned in this article. The Motley Fool owns shares in Tesco.