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Tag: Dividend

Don’t doubt Next Plc. Why I think the Motley Fool is wrong to be so bearish.

Browsing the news section for Next Plc yesterday uncovered a nasty surprise. Yet another Motley Fool article that scratches a few metrics of a stock then deems it a buy…

Browsing the news section for Next Plc yesterday uncovered a nasty surprise. Yet another Motley Fool article that scratches a few metrics of a stock then deems it a buy or sell. This week was the turn of Next, which I find interesting as a shareholder. Royston Wild notes;
“Like Tesco, clothing colossus Next (LSE: NXT) is also being battered by a backcloth of rising competition and the need for savage price cuts.

Competitive pressures have been a particular problem for the retailer’s Next Directory catalogue division, which stole a march on the rest of the high street with the early embrace of e-commerce. But its rivals have invested heavily in this growth channel more recently, giving Next a run for its money.

And I expect revenues at Next — which has already disappointed investors with profit warnings in recent months — to struggle still further as a probable lurch into recession quells British shoppers’ demand for new clothes, and drives footfall at cut-price operators like Primark and H&M.

I reckon Next is an unattractive stock selection at the present time, even in spite of a conventionally-decent forward P/E ratio of 12.4 times”

What Mr Wild isn’t taking into account here is the financial metrics of Next, its superior margins and the ability of management to deal with change.

There’s no doubting that the retail sector is full of competition, and although Next Plc is noting tough trading conditions their lean approach to operations enables them to operate at an operating margin of 20%. Next also have a history of growing EPS despite tough conditions with a growth from £2.51 per share in 2012 to £4.43 in 2016. Mr Wild notes that a squeeze on the spending of Brits will drive customers to low-cost competitors such Primark and H&M but he fails to note that we’ve been here before!

Think of the biggest recession of recent memory – 2008. How did Next perform? Whilst it’s true that sales suffered with like for like retail sales down 7% the company proved its durability by maintaining its dividend payments and keeping a robust balance sheet. Next is a company that has performed exceptionally well since it flirted with bankruptcy in 1998 and the lessons learnt then still shape the company today.

Next Directory

Mr Wild notes in his article that competitors are finally starting to catch up with Next directory. Many may also be fearful of online competition from online only retailers such as ASOS. Whilst it may be the case that competitors have caught up and it may appear that this has had a negative effect on the performance of Next directory the figures paint a different picture. In fact, Next directory sales increased by 8% between 2015 and 2016, with Next retail also growing by an admittedly anemic 1%. The online retail sector is going to continue to grow and I see no reason why Next can’t compete and continue to grow its Next Directory sales.

Future EPS growth.

This is admittedly a worry for the company as it competes in a tough market and with the company already lean it’s hard to see how growth could be achieved through greater efficiency.

I expect Next’s growth to remain steady over the coming years as they fight to defend their market share. I don’t expect Next to flourish, but I certainly expect it to be solid and sound until consumer spending picks up.


What’s great about Next is that management loves to buy up its own shares when they feel they are undervalued, usually at or under £65 a share. Showing that their confident in their performance and that the company has access to cash if needed. The share price currently sits at £54 a share, sporting a low p/e ratio of 12.2 given that the company was trading at 17.6 times earnings in 2014 and 17.3 times earnings in 2015.


This is what really attracts me to Next plc. The dividend payout ratio for the stock in 2016 was only 36%, meaning that the company is comfortably covering its payments and has plenty of room to increase the payout ratio to maintain the dividend over the coming years even with weak EPS growth.

The current dividend yield on offer is a decent 2.9%, nothing to get excited about but better than a bank account in the current environment, one must also consider the company’s habit of paying a special dividend with its spare earnings when it considers it share the price to be overvalued. This year they paid a juicy special dividend of 60p. Whilst investors should never expect special dividends, they’re always a bonus and can help boost your dividend income. For illustrative purposes, if we included the special dividend it would give Next a yield of 3.8%.


Whilst admittedly Next wasn’t my wisest buy ever, I certainly wouldn’t tell investors to ‘avoid at all costs’. Next has a great management team that came through 2008 and I have full confidence in their ability to come through any coming recession, we might even see a few less lean competitors suffer! Yes, competitors have significantly improved their online offering but that doesn’t mean that Next directory can’t continue to grow in a growing market.

Next deserves its place in my portfolio and I will only sell if managements attitude towards the dividend changes or if its fundamentals deteriorate significantly.

Disclosure: Long NXT

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Does Britvic (BVIC) offer value in an overpriced market?

While a confident bull market coupled with economic growth encourage riskier investments in sectors such as bio-tech and tech, conversely, any market panic (Brexit + lower forecast economic growth) tends…

While a confident bull market coupled with economic growth encourage riskier investments in sectors such as bio-tech and tech, conversely, any market panic (Brexit + lower forecast economic growth) tends to encourage investors to flock to safer, more predictable industries such as consumer staples and pharmaceuticals, after all, people always have to eat and drink!

If we are to look at the current economic climate things are far from certain in the UK. We are faced with low interest rates, a forced stimulus package from the BoE and the uncertainty of a British exit from the EU. This climate has undoubtedly driven investors to stocks such as Unilever, Reckitt Benckiser and even Nestle which are seen as safer investments. This means that it has become increasingly difficult to find value in the current market.

For example,Reckitt Benckiser is sporting a p/e ratio of 34, Nestle of 26 and Unilever of 24 meaning that investors are paying more for steady earnings. Whilst I still consider these stocks solid investments, it’s hard to see value for money at such valuations.

Having scoured the FTSE100 and FTSE250 to try and find value in the sector I came across Britvic PLC which I feel offers significant value to investors. Britvic Plc is a United Kingdom-based soft drinks company. The Company offers sparkling sodas, juice drinks, ice tea, squash, syrups, mineral waters, mixers and energy drinks. The Company operates through five segments: GB stills, GB cards, Ireland, France and International. The Company manufactures, markets and sells its range of brands, including Pepsi, 7UP, Lipton Ice Tea and Mountain Dew.

Britvic’s shares are down 11% over the past year on a cocktail of worries including the UK’s decision to impose a sugar tax and a slow start to the year with lower than expected revenue. But these are all short term pressures and the company can certainly adapt to such legislation.

With a p/e of just 15 and a progressive dividend policy with a 10 year streak of increasing dividends (bar a freeze between 2011-2012) This stock looks appealing, so let’s take a closer look.

The dividend

Britvic’s dividend payout ratio currently stands at 55% with a dividend cover of 1.8. Whist not excellent, this is a decent ratio meaning that the company has its dividend payments well covered. Given that the company follows a progressive dividend policy I can certainly see room for an increase in the dividend payout ratio in order to continue to increase the dividend in the short term if results disappoint.

The stock also offers a juicy yield of 3.7% – certainly not bad.

Any red flags?

One criticism of Britvic and a potential reason as to the low current valuation is the level of debt it carries. I am slightly concerned at the debt Britvic currently holds with a debt to equity ratio of 2.8 the company appears highly leveraged, especially for its sector, although this ratio has declined over the past 5 years due to an increase in assets and the debt is also well covered by earnings (5.1x). I would still be comfortable buying in at this level buy would certainly like to see a reduction in debt over the coming years.

Also, unlike other stocks mentioned in this article Britvic does lack diversity in its portfolio. I must emphasise that Britvic’s brands are restricted to the beverage industry and as such offer less security than diversified conglomerates such as ULVR.


For me, Britvic PLC offers outstanding value in this overpriced sector. With a p/e ratio of only 15 and a history of a continued increase in EPS I feel that this stock is significantly underpriced by the market.

Using a dividend discount model I calculated a fair value of the stock as follows;

Britvic has managed to increase its dividends by an average of 6.61% over the past 5years. With an upward trend in EPS and room in the payout ratio I see no reason why we can’t conservatively estimate a yearly dividend growth of 6.6% for the stock going forward based on these factors.

I also factored in a discount rate of 10% accounting for the risk the debt poses and the relative uncertainty of this small cap stock compared to peers.

The equation – Price = Estimated value of next year’s dividend (1)/(discount rate – Dividend growth rate) gave me a fair value estimate of: 676.47p per share.

This means that according to my analysis this share appears 10.7% undervalued.




Disclosure: I currently hold no position in BVIC but do intend to initiate a position over the next month if capital allows me to do so.

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