LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.
So this series aims to identify appealing FTSE 100 investment opportunities and today I'm looking at Next (NXT -0.79%), the U.K.-based fashion and accessories retailer.
With the shares at 4,340 pence, Next's market cap. is 6,961 million pounds.
This table summarizes the firm's recent financial record:
| Year to January | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue (million pounds) | 3,272 | 3,407 | 3,298 | 3,441 | 3,563 |
| Net cash from operations (million pounds) | 449 | 572 | 452 | 526 | 659 |
| Adjusted earnings per share (pence) | 156 | 188.5 | 221.9 | 255.4 | 297.7 |
| Dividend per share (pence) | 55 | 66 | 78 | 90 | 105 |
Strong recent full-year results continue to support the wisdom of Next's focus on design and quality. Many covet the clothing brand, and from what I've seen, cash-strapped households often prioritize such posh-clothing purchases over mundane items, such as utility bills, for example! That's great for Next investors. It means that the firm has captured a big chunk of the mass market.
Next's two-pronged attack saw around 51% of underlying profit come from its 6.7 million square feet of trading space and some 46% from its complementary directory business last year, with the rest of its profit from other sources. But it's nearly all derived from the U.K. Despite also operating in around 60 international territories, the firm gained just around 1% of Next-brand profits overseas. To me, that means there is still great potential for expansion and total investor returns from here.
Next's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:
- Dividend cover: adjusted earnings covered last year's dividend around 2.8 times. 4/5
- Borrowings: net debt is around 75% the level of last year's operating profit. 4/5
- Growth: revenue, earnings, and cash flow have all been growing. 5/5
- Price to earnings: a forward 12.5 looks up with growth and yield forecasts. 3/5
- Outlook: good recent trading and qualified optimism in the outlook statement. 5/5
Overall, I score Next 21 out of 25, which encourages me to believe the firm has potential to outpace the wider market's total return going forward.
Foolish summary
Next scores well on my quality indicators and presents today at a fair price compared to growth and yield expectations. That encourages me to believe that, yes, I should invest in Next at some point.
I should, I really should. But a growth story that one of the Fool's top investment writers has uncovered tempts me. He has put his money where his mouth is by investing and believes the share is the "Motley Fool's Top Growth Share for 2013." In this new Fool report, you can discover how the firm has reenvisioned itself to allow for tremendous growth along new horizons. Right now, the report is free to download and tells you exactly why our expert has invested in, and expects strong growth from, this changing company with a strong pedigree. To get your copy, click here.
