The boom times are back! Figures released this morning show that UK unemployment has hit a six-year low, job openings are at their highest levels on record and wages are growing.
What’s more, figures released at the end of last year show that the UK economy is now 2.9% bigger than the pre-recession peak. Economic growth of 2% to 3% is expected this year.
With the economy roaring back to life, Britain’s retailers look set to report an impressive set of sales figures for 2015. And three of the best retail picks are Dixons Carphone (LSE: DC), Home Retail (LSE: HOME) and NEXT (LSE: NXT).
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Growth at a reasonable price
After electronics retailer Dixons merged with Carphone Warehouse last year, the enlarged group has set out on an ambitious growth tangent.
According to City forecasts, the group’s earnings per share will expand by 24% during 2015, 20% during 2016 and 12% during 2017. Even though the company currently looks expensive, these figures show that the growth is worth paying a premium for.
Dixons Carphone currently trades at a forward P/E of 18.3, falling to 15.5 by 2016. Further, there’s a high chance that these City forecasts could be revised higher as consumers increase their discretionary spending in line with wage growth.
Higher spending
Owner of Argos and Homebase, Home Retail is also set to benefit from a higher levels of discretionary spending.
The past few years have been tough for Home Retail as the company’s margins and sales have been impacted by the rise of competitors such as Amazon. Squeezed consumer budgets have also dented company margins.
However, with the economy growing again, unemployment falling and wages rising, Home Retail should see an uptick in sales. EPS growth of 14% is expected during 2015 and the company is trading at a forward P/E of 16.5, putting the company on a PEG ratio of 1.2. EPS growth of 9% is expected for 2016 and a further 10% growth is slated for 2017.
Once again, these figures are likely to be revised higher as consumers start to spend again.
Looking after shareholders
Finally, high-street retailer Next looks set to benefit from improving economic growth and a booming housing market.
Still, Next is not cheap. The company currently trades at a forward P/E of 17.9, falling to 16.6 during 2016 and then 15.4 during 2017. However, what’s really attractive about Next is the company’s well-established policy of returning surplus cash to shareholders via share buybacks or special dividends.
And the group is forecasting £360m of surplus cash for 2015. Management has stated that if it’s unable to return cash by means of a buyback scheme — the group has set an upper limit for share buybacks of £67 per share — cash will be returned via four quarterly special dividends.
Each special dividend will total £90m, around 60p per share per quarter. On this basis, Next is set to yield 3.3% this year, although once again, there’s a chance that the company could beat its own profit forecast if sales start to accelerate. This could mean more surplus cash will be returned to investors.
