Where next for NEXT?

The Next (NXT) 7,835p share price valuation seems to assume low earnings growth in comparison with the rates actually achieved over the last five years. It has also become a high dividend paying stock – at least for this year and next according to consensus forecasts. The company is still growing its store and directory sales. There is a lot of overhead resistance around 8,000p a share. The market apart, this share looks reasonably valued and attractive on dividend yield prospects.     

One does not have to worry too much about an investment in Next (NXT) shares. Generally speaking, they tend to look after themselves – not like some other shares which can disturb the slumbers of a deserving investor in equity. You do not need a bottle of Night Nurse to ensure peaceful dreams with Next!

I see that last time I wrote on the activities of Next, it was a review of the final results when the share price had sailed down to 7,625p. I had previously, at the beginning of that year, apparently come to the conclusion that Marks & Spencer (MKS) looked better value than Next and had suggested that possibility in my jottings. Marks duly obliged for a while, in a reward to a faithful follower of fashion.

I just could not believe that a company like Marks & Spencer was incapable of making progress, which it wasn’t. However, it was a fitful progress whereas that of Next has returned to usual winning ways. So, I changed my view last April when Next was 7,624p after a period of uncharacteristic share price strength from M&S.

So what of Next now? The share price did reach 8,030p a few days ago and last seen, was 7,835p. Over a year, the Next share price has risen by over 20% whereas the market in the shape of the FTSE 100 Index slid 5%. “Technically” – an odd word to describe the sedentary act reading share price charts – the Next share price has recently bounced off a well established uptrend support and on the face of things, looks to be continuing to trend its way further north into new share price territory, providing it can plough through what looks like a barrier of overhead resistance at just above 8,000p.

Last year, to 25 January 2015, the market consensus crowd reckoned that on a annual comparison basis, Next earnings rose 15% to just under 420p a share putting them a current historic price to earnings ratio of 18.6 times. More than 18 years’ earnings seems pretty high absolutely but not so high relative to the comparable current PER of 17.3 times on the FTSE100 Index. Particularly when the historic dividend yield for said index is 3.83% compared with the historic dividend yield on Next shares of 4.2% (including the special dividends being paid by Next).

Looking out to this year end and beyond, the market in its consensus estimates and forecasts is strangely subdued in its expectation of earnings growth from Next. It forecasts a reported 8% increase in earnings for this year and a 6% increase for the following year. Is Next going a bit ex-growth? Maybe it would be on a lower price to earnings ratio if it were not for the dividend income stream from the company which, on the basis of market consensus estimates, is forecast to be 5.2% for this year and 5.4% for next year.

The cash generative machine

The company is now so cash generative that in addition to regular dividends it is also paying special dividends as well on a quarterly basis. Excluding those for last year, the regular annual dividend looks as though it would have been only 1.9% on a regular annual dividend of 150p, which implies a dividend payout as a ratio of total earnings at 420p of only 35%. It appears that Next has reached a stage where it feels that it can increase the amount paid out in dividends to an estimated 80%, well above the average market payout. To judge from the consensus estimates I have seen, the market is forecasting that to go on at least into next year.

Two points are to be noted on operating cash flow: first that most of it comes from increasing net profit, depreciation being the minority provider of cash. In the year to January last, depreciation was only 15% of stated operating cash. That number has shrunk over the last three years as net income has grown. In the year to January 2013 that percentage was closer to 18%.

With cash flow becoming increasingly dependent on net profit it could be, in theory at least, more volatile; except that in the case of Next the bottom line seems to continue to grow.

Growth

In the half year to July, the company added 4% to store space by adding an extra three stores and changing others. That growth, we are informed, will continue this year and next. New stores are reported to achieve payback within 18 months.

Payroll management

On wages, the company thinks that it can manage a living wage of £7.20 through achieved changed staff numbers and contracts and improved productivity. Staff are being utilised more economically. Any amount above £7.20 is dependent on rising wage inflation to make its contribution to the arithmetic involving medians and proportions etc. The company estimates that, as a result of its changes, payroll costs this year as a percentage of sales will be almost the same as they were in 2012; to be precise a tiny increase of 0.2%.

The company says that a rising living wage can be absorbed providing real wages increase sufficiently to keep the amount passed on to customers limited.

This is a complex subject of specialist arithmetic and specialist insight for the assumptions underlying management responses. The point being, that NEXT has thought about it deeply enough to allocate space to its thinking and is clearly addressing the challenge.

We are told that growth is also being achieved for its Directory sales by establishing distribution “hubs” and help desks  in Russia to serve Moscow (24 hour delivery for Moscow and 48 hour delivery for St. Petersburg) and Shanghai (to serve Hong Kong  and later mainland China and Taiwan).

From small beginnings Directory overseas sales have increased twenty fold since January 2013 with net profits increasing.