Should I Buy Marks & Spencer or Next?

LONDON -- High street retailers Next  (LSE: NXT  ) and Marks & Spencer  (LSE: MKS  ) (NASDAQOTH: MAKSY  ) need no introduction; but as investments, they present very different pictures.

The big winner of the last decade has been Next. The fashion retailer's share price has risen by 418% over the last 10 years, while Marks & Spencer has only managed a 22% gain.

It's true that Marks & Spencer was much bigger to begin with; but, as Warren Buffett once said, "the investor of today does not benefit from yesterday's growth." Given this, which company looks like the better investment for the next 10 years?

Marks & Spencer vs. Next
I'm going to start with a look at a few key statistics that can be used to provide a quick comparison of these two companies, based on their last published results:

Metric 

Marks & Spencer

Next

Market cap

6.2 billion pounds

6.9 billion pounds

Turnover

9,954 million pounds

3,516 million pounds

Operating margin

7.5%

17.7%

Dividend yield

4.4%

2.2%

The big difference between these two companies is their profitability and turnover.

Marks & Spencer turned over nearly 10 billion pounds last year, but only 7.5% of this was operating profit. Next's more modest turnover of 3.5 billion pounds provided an operating margin of 17.7% -- 2.4 times that of M&S.

Marks & Spencer's main attraction is its dividend yield, which at 4.4%, is well above the FTSE 100 average of 3.1%.

However, even this isn't as good as it looks. Since 2008, M&S' dividend payout has fallen from 22.5 pence per share, to 17 pence per share. Over the same period, Next has increased its dividend from 55 pence per share, to 93.5 pence per share. Next has a far stronger record of dividend growth -- a key consideration for income investors.

What's next?
Are the trends we identified above about to change, or should we expect more of the same?

Analysts' forecasts are notoriously unreliable, but FTSE 100 companies generally get the benefit of the most comprehensive analysis, and tend to deliver fewer surprises than smaller companies.

With that in mind, let's take a look at some forward-looking numbers for Marks & Spencer and Next. These apply to the companies' current financial years:

Metric 

Marks & Spencer

Next

Forecast P/E ratio

11.1

13.5

Forecast dividend yield

4.6%

2.7%

Forecast dividend growth

0%

8.4%

Forecast earnings growth

5.6%

10.5%

These figures, which are based on the companies' guidance figures and analysts' forecasts, strongly suggest that nothing much is likely to change this year. Next will outgrow M&S, and M&S will continue to provide an attractive income.

Which share should I buy?
There's no doubt that, for growth and long-term income, Next continues to look more attractive than Marks & Spencer.

However, Next's dividend will have to do a lot of growing before it provides the same yield as Marks & Spencer. If, like me, you like the idea of getting an above-average income immediately, then Marks & Spencer may be worth a closer look.

The top growth stock for 2013?
If investing in strong growth stocks like Next attracts you, I'd like to suggest you take a look at one U.K. stock that outperformed the FTSE 100 by 32% in 2012, and has delivered earnings-per-share growth of 44% since 2009.

It's already ahead of the FTSE 100 in 2013, too.

You can find full details of this company -- which the Fool's analysts believe could be seriously undervalued -- in this free report, "The Motley Fool's Top Growth Stock for 2013." Just click here to download your free copy now -- but hurry, it will only be available for a limited time.

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