Inflation-smashing dividend yields? Check. A cheap valuation? Absolutely. Expected earnings growth? You bet.
So why am I still avoiding FTSE 100 retailer Next (LSE: NXT) like the plague? This is why…
Sales growth slipping again
Next’s share price perked up earlier this year as, despite the persistence of worsening consumer confidence and intense competition, it managed to pull some rabbits from its hat and upgraded its profits estimates.
I warned then, though, that the Footsie firm may struggle to keep the ball in the air and last week’s trading update proved just that. Sales performance at its stores has worsened in recent months and dived 8% in the three months to October 27. Online revenues growth has also slowed to 12.7% and, as a result, full-price sales across the group rose just 2% in the third quarter, down from 4.5% in the first half.
At this rate, City estimates for Next’s earnings to rise 5% in the year to January 2019, and by an extra 3% next year, are looking very sketchy at best. As a consequence, its prospective P/E ratio of 12 times, while low on paper, can be seen as not that appealing.
Costs clamouring higher
Its rising cost base is another obstacle that will likely prevent Next storming back into earnings growth any time soon. Items like the new National Living Wage, increased interest rates on its debt, and rising business rates all threaten to push costs £55m higher in the current year, for example. And the firm will have its work cut out for it to cover such increases through its cost-cutting procedures — for fiscal 2019, for example, it expects these savings to total £44m, falling some way short of those anticipated cost increases.
One particular cost to keep an eye on is the rise in bad debt charges at its credit arm. These boomed 72% during the six months to July, to £25.8m, and threaten to spiral out of control as the British economy worsens.
Dividends poised to disappoint?
Those aforementioned City forecasts tipping fresh earnings growth lead to predictions that Next, which has kept the dividend locked at 158p per share for the past two years, will also finally raise the dividend.
Payouts of 162.6p and 165.3p are predicted for fiscal 2019 and 2020 respectively, figures which yield a chunky 3.1% and 3.2%.
I’m sceptical as to the likelihood that these projections will become reality. On top of the aforementioned fragility of current profits forecasts, the state of the retailer’s balance sheet also undermines its ability to get dividends moving higher again, net debt having grown to £1.14bn as of July from £1bn six months earlier.
There’s no shortage of great FTSE 100 dividend stocks trading on low earnings multiples following October’s market sell-off. Next comes with too much risk right now, in my opinion, and I for one will continue giving it a wide berth until retail conditions in the UK markedly improve.
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Royston Wild 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.