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What Are NEXT plc’s Dividend Prospects Like Beyond 2014?

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Today I am looking at British clothing and homeware retailer NEXT‘s (LSE: NXT) dividend outlook past 2014.

A fashionable income selection

NEXT has punched mammoth earnings expansion over each of the past four years, recovering strongly from the fallout of the 2008/2009 financial crisis and subsequent impact on spenders’ budgets. Indeed, the company has seen earnings grow at a compound annual growth rate (CAGR) of 12.1% since 2010, and this excellent growth has delivered compound growth of 12.3% in the dividend.

Promisingly, the City’s number crunchers expect earnings growth to grow 17% in the year concluding January 2014, with advances of 8% pencilled in for each of the following two years.

Given these sterling earnings projections, NEXT is expected to keep dividends rolling at breakneck speed. A 17.1% advance is expected for this year, to 123p per share, followed by an 11.1% increase in 2015 to 136.7p. A dividend of 150.9p per share is predicted for 2016, a 10.4% rise.

The company’s robust earnings outlook creates cast-iron dividend coverage well above the safety watermark of 2 times prospective earnings — indeed, cover comes out at 2.8 times through to the end of 2016. Moreover, NEXT’s ability to generate shedloads of cash should also boost investor faith in dividend projections for this period, with free cash flow leaping to £239m during February-July versus £127m in the corresponding 2012 period.

However, dividend projections through to 2016 create yields substantially below the FTSE 100’s forward average of 3.1%, as well as those of high-street rivals Marks & Spencer Group and Debenhams, which sport prospective readouts of 3.6% and 4.2%. By comparison, NEXT’s dividend yields for the next three years come in at 2%, 2.2% and 2.4% respectively.

However, I believe that NEXT’s impressive cash-generative qualities make it a stunning income pick. Although yields remain below those of the wider market, the company plans to continue compensating for this via special dividends and buybacks.  

Indeed, the retailer commented in January’s trading update plans to distribute a 50p per share special dividend following bubbly post-Christmas results. And the business added that “in the year ahead, we currently expect to generate and return a further £300m of surplus cash” which should it intends to distribute to shareholders.

As NEXT continues to defy the effects of declining footfall on the UK High Street, and make stunning progress in online and foreign marketplaces, I fully expect shareholder returns to keep bubbling higher well into the long term.

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> Royston does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares in Debenhams.