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I’d buy this FTSE 100 stock now that it’s paying a special dividend

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A Next shop front inside a shopping centre
Image: Next

Next (LSE: NXT) is a FTSE 100 stock that I’ve been bullish on for some time. Since the beginning of the year, the shares have increased by over 15% and they’re up more than 55% during the past 12 months.

Last week, the retailer released a trading statement and the market was clearly impressed by what it announced. I’m still bullish on the FTSE 100 stock and would buy it right now.

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The update

As I said, the update was positive. Full-price sales in the 11 weeks to 17 July were up 18.6% versus two years ago. Like many companies, Next is comparing its performance to 2019 rather than 2020. Last year was an odd year due to Covid-19, so it makes sense to compare trading with pre-pandemic levels.

I’m not surprised that online sales were the driving force behind the increase in revenue. In fact, e-commerce has helped the fashion retailer survive the coronavirus crisis. And this is paying off again. Strong performance came from home and childrenswear, as well as its third-party LABEL operation.

Next’s digital sales gives me some comfort. It offers the firm a long-term scalable solution. And if we go into another lockdown, it should be able to cope.

Stores

But it’s hasn’t been all rosy for the firm. The retail environment is tough and getting people to pay a visit to its shops has been a problem for Next. Retail store sales are still struggling and I wouldn’t be surprised if it starts to shrink its store estate in the future.

It needs to find ways to increase footfall at its shops. Otherwise this will become a cost that could dampen profitability.

Outlook

But just when I question whether Next can improve its performance any further, it goes and upgrades it guidance. It has upped its growth forecast for full-price sales for the rest of the year from 3% to 6%.

Not only that, it has also increased its central forecast for full-year profit before tax by £30m to £750m (pre-IFRS 16). It’s worth noting here that this is the top end of its previous guidance. The retailer is clearly doing well, which should push the FTSE 100 stock higher.

Special dividend

For me, the icing on the cake was Next announcing that it will be paying shareholders a special dividend of 110p in September. What’s more, it expects to distribute surplus cash generated as a second special dividend at the end of January 2022.

Of course there’s no guarantee that this will happen. But if it does, it would be announced early next year in its Christmas trading statement. I guess it’s happy days for income investors.

Risks

The FTSE 100 stock isn’t cheap. It trades on a price-to-earnings (P/E) ratio of 36x. Some may be discouraged by this expensive valuation. Next has seen a surge in online sales but there’s no certainty that this trend will continue. That’s especially as it faces stiff competition from other pureplay e-tailers.

But Next continues to outperform and I reckon this can continue. Hence, I’d buy the FTSE 100 stock right now.

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Next. 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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