In a trading statement earlier this month high street retail giant Next (LSE: NXT) revealed somewhat disappointing sales in the run-up to Christmas. Next-branded full price sales in the period from the start of November to Christmas Eve were down 0.4% on the previous year, with a 3.5% decline in store sales largely offset by a 5.1% uplift in directory sales.
Another challenging year
The Leicester-based FTSE 100 retailer is already bracing itself for another challenging year and is readying its full price sales budget accordingly. Management is expecting the cyclical slowdown in spending on clothing and footwear to continue into next year, with the possibility of a further squeeze on spending as inflation begins to erode real growth in earnings. Furthermore, the devaluation of sterling is expected to push up prices on like-for-like garments by up to 5%, with the likely effect being a 0.5% decline in sales revenue.
The group also faces a number of inflationary pressures on its costs base, with the National Living Wage, national business rates revaluation, Apprenticeship Levy, and energy taxes adding around £13m. General inflation in wages and other non-product costs could increase costs by a further £6m, with an additional £10m being used to fund improvements to its websites and online marketing.
Generous windfall
All this negativity paints a gloomy picture for the Next, and the retail sector as a whole. But the company’s shares are now changing hands at less than half their December 2015 peak of £80.15, bringing the forward P/E rating down to just nine for the current year to 31 January. I think the gloomy outlook is already priced-in.
Also reassuring is the news that the company plans to pay out four special dividends this year, amounting to 180p per share, in addition to the regular dividend which yields 4.1% at current levels. I believe Next could be a good long term recovery play, with the added attraction of a generous dividend windfall later this year.
Dividend appeal
Another FTSE 100 stalwart that’s oozing dividend appeal at the moment is UK-focussed housebuilder Persimmon (LSE: PSN). In a recent trading update, management provided an upbeat assessment of its operations prior to publishing its full year results for 2016, which will be released on 27 February. The York-based housebuilder revealed that its revenues for 2016 rose 8% to £3.14bn, with legal completion volumes increasing by 599 new homes to 15,171, and the group’s average selling price rising 4% to around £206,700.
Persimmon’s share price has mostly recovered from the Brexit sell-off, but in my opinion the shares still offer good value trading at 10 times forward earnings, falling to just 9 by the end of next year. There is also a solid dividend on offer at 110p per share, which yields 5.7% at current levels, and is covered twice by forecast earnings.
