Is NEXT plc A Super Income Stock?

Does NEXT plc (LON: NXT) have the right credentials to be classed as a very attractive income play?

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A Super Year

Next’s (LSE: NXT) performance over the last year has been extremely impressive. Not only has it delivered superb share price gains of 61%, it has also significantly outperformed the FTSE 100, too, with the wider index being up just 1% over the same period. Does the price rise mean, however, that Next is no longer an attractive income play? Or is it now a super income stock?

Dividend Growth

Although Next’s yield of 1.9% is not particularly impressive, it is set to increase the amount of cash it returns to shareholders. For instance, the company is forecast to increase dividends at an annualised rate of 11.1% over the next two years. This would, of course, have the effect of increasing Next’s yield (assuming, of course, that the share price stays where it is).

nextHowever, there seems to be scope for Next to be even more generous with its dividend, since it currently has a payout ratio is that is rather low. In the most recent year, Next paid out just over one-third of earnings as a dividend. While it is understandable that the company may wish to use the cash for other purposes and remain cautious during what remains a very tough time for retailers, a payout ratio of anything up to two-thirds could be quite acceptable. Furthermore, such a level would be unlikely to hamper the growth and reinvestment prospects of the company, either.

Resilience

As mentioned, shares in Next have had a great run over the last year. This comes after an extremely difficult period for the UK retail sector, so it’s obvious to ask the question: how resilient is Next’s dividend? As well as being covered three times by earnings, Next has a very good track record when it comes to making dividend payments, with the company not only paying a dividend in each of the last five years, but increasing it in each of those years, too.

Looking Ahead

Therefore, with a fast-growing dividend, the potential to pay out a significantly greater proportion of earnings as a dividend, and resilience when it comes to making payments during challenging economic times, Next remains a very attractive income play. Although its relatively low yield stops it from being a super income stock, it nevertheless remains an attractive stock for income-seeking investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter does not own shares in Next.

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