This FTSE 100 dividend stock looks a better buy than Next

Retail sales continue to fall at top-tier clothing giant Next plc (LON:NXT). Paul Summers reckons this firm could be far more rewarding for investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

It’s fair to say that most listed retailers (and their investors) won’t have particularly fond memories of 2018. Huge share prices falls in companies such as Debenhams, Mothercare, Footasylum, and Quiz demonstrate just how savage the market can be if numbers fail to impress. 

For this reason, holders of high street clothing giant Next (LSE: NXT) can consider themselves rather fortunate. Compared to the aforementioned laggards, the Simon Wolfson-led company has done rather well with shares 19% higher than at the start of the year, before this morning’s brief trading update was released. That said, I remain fairly apathetic towards the stock. 

Mixed bag

As predicted by the FTSE 100 constituent, full-price sales were 2% higher over the third quarter to 27 October on that achieved last year. 

The company’s online operations continue to do well, with sales rising 12.7% in the three months, and just under 15% in the year to date.

In contrast, however, sales at physical stores remain a drag on performance, falling by 8% over the reporting period. When combined with the first two quarters of the year, that brings retail sales down 6.3% in 2018, going some way to explaining why the stock fell in early trading.

Despite this mixed performance, the company elected to maintain its guidance on sales and profit for the full year, as revealed alongside its interim results back in September. Full-price sales are expected to be 3% higher in 2018/19 than in the previous financial year, with pre-tax profit and earnings per share increasing by 1% (£727m) and 5%, respectively. Clearly, a lot will hinge on how the company performs in the run-up to Christmas. An update on trading for the festive period is due on 3 January. 

With analysts predicting tepid earnings growth next year, however, the question remains as to whether the shares are worth buying. 

On a price-to-earnings (P/E) ratio of 12, Next’s shares are neither ludicrously overpriced nor screamingly cheap. A cash return of a little under 165p in the next financial year equates to a yield of 3.1% — not bad, but hardly the stuff of dreams for income-focused investors.

As far as firms on the high street go, Next looks more resilient than most. As an investment at the current time, it looks decidedly average in my opinion. 

Income and growth

Its business may be a million miles away from the high street but, for me, defence juggernaut BAE Systems (LSE: BA)  represents a better pick at the current time.

A fall of roughly 23% from the all-time highs reached in the summer means leaves the shares on a similar valuation to Next, and great value relative to other firms in its industry. Forecast earnings growth of 9% next year leaves the stock on a PEG ratio of 1.3, meaning that investors will be getting far more bang for their buck, compared to the 3.5 predicted for BAE’s top tier peer (n.b. the lower the PEG, the better).

Income investors also get a better deal with the £16bn-cap expected to yield just over 4.6% next year, based on the current share price. While dividend growth is nothing to get excited about, it is nevertheless consistent, with a near-4% hike expected next year on payouts that are likely to be covered twice by profits. 

With political tensions remaining high and defence budgets rising, I maintain that BAE is a great pick for most ‘buy and hold’ 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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How much does an investor need in a Stocks and Shares ISA to earn £1,000 a month in passive income?

A Stocks and Shares ISA's a valuable asset for investors. Not having to pay dividend tax can be a big…

Read more »

Investing Articles

9% dividend yield! Could buying this FTSE 250 stock earn me massive passive income?

Assura looks like an outstanding stock for dividend investors to consider. But is the 9% dividend yield the passive income…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Why I think this month could be critical for the Lloyds share price!

Our writer explains why he thinks the bank's 2024 results will have a significant impact on the short-term direction of…

Read more »

British Pennies on a Pound Note
Investing Articles

This former penny share has soared 168%. Is the best yet to come?

When Christopher Ruane saw a penny share as a potential bargain last year, he was spot on. So having not…

Read more »

Mature couple at the beach
Investing Articles

£20k in an ISA? Here’s how it could generate £1 of passive income every hour — forever

With a long-term approach, Christopher Ruane explains how an investor could aim to earn a pound per hour in passive…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

FTSE shares: overpriced or still a bargain?

Christopher Ruane reckons a storming FTSE 100 performance of late doesn't tell us much about whether there are still possible…

Read more »

Blue NIO sports car in Oslo showroom
Investing Articles

Would an investor have made money investing £2k in NIO stock 5 years ago?

Our writer looks at how NIO stock has performed over recent years and weighs the bull and bear cases as…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

5 steps to start buying shares with £5 a day

In a handful of steps, our writer explains how someone new to the stock market could start buying shares for…

Read more »