It Could Be Time To Sell Marks and Spencer Group Plc And Buy Next plc

After recent gains it could be time to sell Marks and Spencer Group Plc (LON: MKS) and buy NEXT plc (LON: NXT).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

During the past 12 months, Marks and Spencer’s (LSE: MKS) shares have outperformed the wider FTSE 100 by around 28% as the company’s turnaround starts to take shape.

However, it’s unlikely that this rally will last, and investors could use this chance to sell up and buy Next (LSE: NXT), which has a more impressive record of creating value for shareholders.

Lumpy figures 

Marks and Spencer’s gains are a direct result of the company’s upbeat trading figures. Indeed, the company beat expectations for the first quarter by reporting that clothing sales and homeware sales at established stores rose by 0.7% in the 13 weeks to 28 March, bringing a halt to four years of declines.

Should you invest £1,000 in BAE Systems right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BAE Systems made the list?

See the 6 stocks

This impressive performance didn’t last for long. During the 13 weeks to 27 June, general merchandise sales declined 0.4% on a like-for-like basis. Food sales expanded 0.3% on a like-for-like basis.

Marks and Spencer has been trying, and failing, to re-ignite sales growth of clothing and homeware items for several years to no avail, while smaller, more nimble peers (like Next) have eaten away at the group’s market share. 

And Marks and Spencer’s position in the market, as an old-fashioned, bricks-and-mortar retailer with a high-cost base, puts it at a disadvantage when trying to compete with experienced multi-channel retailers like Next. 

High returns

The difference in return on capital employed between the two companies really illustrates this point. Simply put, ROCE is a telling and straightforward gauge for comparing the relative profitability of similar businesses and is an excellent way to measure a company’s success.

According to my figures, Marks and Spencer’s five-year average ROCE is a respectable 13.9%, but it’s been falling steadily. Next’s five-year average ROCE is a staggering 58.2%. 

Standing out

These returns mean that Next stands out from its peer group. Additionally, the company is devoted to returning excess cash to investors.

Last year, Next paid out £223m in special dividends to shareholders on top of the regular payout giving a total dividend yield of 4.6%. Figures suggest that the company’s total dividend issuance this year will give investors a yield of around 5%. City figures suggest that Marks and Spencer’ shares will only yield around 3% this year. Next intends to pay a special dividend of 60 pence per share on 2 November 2015.

Furthermore, Next is one of the few companies that has a disciplined stock repurchase programme in place. Specifically, the company will only buy back shares if it can earn an 8% return on the repurchase, for this to happen, the company’s share price has to drop below 6,827p.

This disciplined strategy has helped the company increase earnings per share by 1000% over the past 15 years. Operating profits have only expanded 350% over the same period. Earnings per share have doubled since 2011.

Still, this kind of growth comes at a cost and Next’s shares aren’t cheap. The company is currently trading at a forward P/E of 19.3, but Marks and Spencer’ shares look slightly cheaper on the face of it, as the company is trading at a forward P/E of 15.5. However, the difference in performance of the two companies over the past few years easily explains the valuation gap.

Foolish summary

So overall, when Marks and Spencer and Next are placed side by side, Next comes out on top. That’s why I would sell Marks and Spencer and use the cash to buy Next.

 

But there may be an even bigger investment opportunity that’s caught my eye:

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

After collapsing 28% today, are Bunzl shares too cheap to ignore?

A poor trading statement has sent Bunzl shares to multi-year lows. Could now be a good time to consider investing…

Read more »

Investing Articles

These 5 stocks could earn £1,600 of annual passive income in a £20,000 ISA

Harvey Jones shows how to generate a high and rising passive income by buying a balanced mix of high-yielding FTSE…

Read more »

Young woman holding up three fingers
Investing Articles

3 things I like about Greggs shares

Greggs shares have tumbled by more than a third over the past year. But this writer has no plan to…

Read more »

artificial intelligence investing algorithms
Investing Articles

Nvidia stock: beware the bear market rally

Andrew Mackie argues that investors should tread carefully before investing in Nvidia stock, as the worst of the sell-off could…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Up 73% in one year, is this the best value stock in the FTSE 100?

A brilliant run of form suggests this FTSE 100 giant should no longer make the cut as a value stock.…

Read more »

Investing Articles

The best could yet be to come for UK shares! I’m buying these ones

Amid ongoing stock market turbulence, this writer's been adding selected UK shares to his portfolio. Here's why and what he…

Read more »

Top Stocks

4 UK stocks trading well below book value to consider buying

Sometimes, it pays to be contrarian: who says the UK market has priced a stock precisely right, anyway?

Read more »

Investing Articles

The S&P 500’s 12% off its highs. Is now a good time to buy US shares for an ISA?

Right now, a lot of British investors are wondering whether it’s a good time to buy US shares. Here, Edward…

Read more »