Next (LSE: NXT) would have to feature in my top five FTSE 100 income and growth picks for 2020.
Over the past two or three years, the fashion retailer has transformed itself from being a business focused on the high street, into more of an online retail giant. Over 50% of sales now come from Next’s digital operations, and e-commerce sales are growing at a double-digit rate.
Bucking the trend
As other retailers have struggled, Next has managed to buck the trend by splashing out on its online infrastructure, while keeping costs under control at the high street business. Further investment in online infrastructure is planned over the next few years, with £300m of capital spending earmarked to improve warehouses and logistics.
Unfortunately, City analysts are expecting the company’s earnings per share to fall by around 8% in its current financial year, but the group is expected to return to growth in 2021. On top of this, Next has a history of outperforming City expectations.
Management tends to adopt a conservative approach when predicting growth, so the company usually beats expectations when it eventually publishes results. On that basis, I wouldn’t rule out a better-than-expected performance from the business than analysts are currently projecting.
Next also likes to return cash to investors. The dividend to shareholders has increased at a compound annual rate of 5% per annum for the past six years, and the company’s been repurchasing stock.
While is a dividend yield of only 2.5% isn’t particularly attractive at first glance, because the distribution is covered 2.7 times by earnings per share, I think what the payout lacks in size, it more than makes up for in quality. That’s why I’d buy shares in Next as an income and growth stock for 2020.
Buy and build
Another FTSE 100 growth champion I have my eye on is distribution business DCC (LSE: DCC). Just like Next, DCC doesn’t offer the highest dividend yield on the market, but the company’s growth is what excites me.
Over the past six years, DCC’s earnings per share have grown at a compound annual rate of 16%. A combination of both organic and bolt-on growth has helped lift the bottom line, and it seems the City is expecting more of the same over the next few years. Analysts are projecting total earnings growth of around 20% by 2021.
On this basis, shares in DCC are currently dealing at a 2021 P/E of 17 and the stock also supports a dividend yield of 2.3%. This payout is covered 2.5 times by earnings per share. So, not only does the company have plenty of headroom to increase the distribution, but management also has scope to reinvest profits back into acquisitions and organic growth.
As DCC has such an impressive track record of acquiring companies and integrating them effectively, I’m optimistic management can continue on this course for many years to come.
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Rupert Hargreaves owns shares in Next. 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.