I’d buy this top FTSE 100 dividend stock for long-term income and growth

This well-run retailer looks like a great source of dividends to me, with a strong share buy-back programme as well.

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There are some top FTSE 100 dividend stocks offering heady yields of 6%, 7%, 8%, or more. However, I don’t need an eye-catching yield to consider a company a top dividend stock.

I’m a huge fan of multi-channel clothing retailer Next (LSE: NXT) plc, which I believe offers great long-term dividend prospects, plus share price growth on top.

By rights, Next should have been savaged by the Covid pandemic and the shift to online shopping, the former having forced the closure of more than 8,700 non-essential UK stores in the first six months of last year alone, according to the Local Data Company.

I’d buy this top FTSE dividend stock today

But Next survived Covid and has turned the web to its advantage by developing a thriving online operation. Web sales supported margins during the pandemic, and now high street store sales are bouncing back.

In the year to January 2022, brand full-price sales jumped 12.8%, while profit before tax climbed 10% to £823m. It is worth noting that this is an increase of 140% since the pandemic-ravaged year of 2020/21.

Next did halt its dividend payments in the pandemic, but that was hardly surprising given the uncertainty at the time. It has since paid two special dividends, of 110p per share last September and 160p in January. 

I’m delighted to see that management plans to return to its pre-pandemic ordinary dividend cycle in the year ahead, starting with an ordinary dividend of 127p on 1 August.

Dividend cover remains health at 2.8 times, in line with the company’s long-standing policy, so it looks solid to me. The current dividend yield of 2.08% may be low, but I would expect that to rise over time, assuming trading gets back to normal.

As ever, there are risks. Retail remains a tough sector. New web threats will emerge. War in Ukraine has hit Next, forcing the closure of its websites there and in Russia.

Next offers share buybacks too

Lower overseas growth expectations also forced it to lower its sales guidance by £85m next year, and profit guidance by £10m.

Costs are expected to jump by over £140m, although the company expects to recoup almost £80m of that from savings. The Next share price has fallen by a quarter over the last six months, reflecting these uncertainties. 

Yet I think shareholders have been harsh on a really well-run company with strong dividend prospects, and I’m tempted by today’s entry P/E of just 11.36 times earnings.

Management has been extremely generous with shareholders, paying out the large majority of its excess profits in dividends.

Last year, Next generated £363m of surplus cash. In total, it returned £353m of that to shareholders, with special dividend payments totalling £344m and share buybacks adding another £9m.

That’s the spirit! AJ Bell calculates that Next paid out £2.3bn in dividends and £1.9bn in buybacks over the past decade. Investors often overlook buybacks but they have reduced the Next share count from 181m to around 127m, increasing the stake of loyal investors by almost a third.

So it’s not just a great dividend stock. It should give me growth as well.

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.

Harvey Jones doesn't hold any of the shares mentioned in this article. 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.

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