Many top FTSE 100 companies are currently offering dividends above the interest you can get from cash or bonds — and with the potential for real future income growth
In this series of articles, I’m assessing how the companies measure up as income-generators, by looking at dividends past, dividends present and dividends yet to come.
Today, it’s the turn of leading middle-market clothing retailer NEXT (LSE: NXT).
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Dividends past
The table below shows NEXT’s five-year earnings and dividend record.
| 2008 | 2009 | 2010 | 2011 | 2012 | |
|---|---|---|---|---|---|
| Statutory earnings per share (EPS) | 156.0p | 188.5p | 221.9p | 282.0p | 320.1p |
| Underlying EPS | 156.0p | 188.5p | 221.9p | 255.4p | 297.7p |
| Ordinary dividend per share | 55p | 66p | 78p | 90p | 105p |
| Dividend growth | 0% | 20.0% | 18.2% | 15.4% | 16.7% |
As you can see, NEXT has delivered overall super-strong dividend growth across the last five years. Even including a flat dividend for 2008, the average annual increase works out at an impressive 14.1% — streets ahead of inflation.
The total of 394p a share paid over the period was covered a very robust 2.8 times by total underlying EPS of 1,119.5p. Companies’ underlying EPS numbers are often more flattering than the statutory version, but not in NEXT’s case: statutory EPS of 1,168.5p covers the dividend three times.
An overall superb dividend performance through a time when many retailers have struggled.
Dividends present
NEXT has so far paid an interim ordinary dividend of 36p for the current year (ending 31 January). The analyst consensus is for a final dividend of about 86p when the company announces its annual results on 20 March — giving a 2013 full-year payout of 122p (up 16.2% on 2012).
However, shareholders were pleasantly surprised last week when NEXT released a Christmas trading update and announced a 50p special dividend. Anyone investing in the company before the ex-dividend date of 15 January will pick up the special.
At a share price of 6,150p, NEXT’s current-year ordinary dividend represents a yield of 2%; but the yield becomes 2.8% if the special dividend is included.
Dividends yet to come
Analysts have penciled in 10% increases in the ordinary dividend for both the year to January 2015 and the year to January 2016. Forecasts of EPS growth at a similar rate would see dividend cover maintained at the super-strong 2.8 level.
Furthermore, NEXT has said that the recent 50p special dividend isn’t a one-off. The company is generating more cash than it needs for reinvesting in the on-going development of the business. It has been buying back its own shares, but management has a maximum price at which it will buy (currently 5,800p). The board said in its recent trading update:
“If our shares trade consistently above this limit, and as a result we do not buyback shares, we will pay a further 50p special dividend in May and thence quarterly going forward until such time as a lower share price, or higher profits, allows us to return meaningful sums of money through share buybacks … In essence we are introducing a rolling quarterly special dividend, which will stay in place as long as our share price remains consistently above our buyback limit”.
If analyst forecasts for the ordinary dividend for the year to January 2015 are on the button, and the special dividends come through, the total payout would imply a yield in the region of 5-6%.
With robust cover of the ordinary dividend and the new policy of paying regular special dividends when the share price is above management’s buyback limit, the dividend yield looks attractive and the income-growth prospects bright for the foreseeable future.
