Should you buy these 2 dividend-paying growth stocks?

These two established stocks could stand to reap massive gains from the decline of the high street.

| 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.

In the last few years we have reached a tipping point in the decline of the high street that could cause a surge in online clothing sales, and turn growth potential into massive profits. Superdry (LSE: SDRY) and Next (LSE: NXT) are two companies that have positioned themselves well for the future of e-commerce.

One to watch

In the past year, Next shares have gone from just over £40 to over £60 based on their online growth. Although they have dipped recently, this could signal a good buying opportunity. Next’s retail sales are declining but online sales have been up 15.5% for the first half of this year. I am particularly impressed by the management, who don’t seem to try and hide the shortcomings to the business and are very quick to point out where sales have benefitted from external factors. Next’s management seem focussed on growing the business rather than trying to generate spin. This is why Next could be such a good buy-and-hold share: as long as management keep working toward their goals, there is little reason they shouldn’t keep delivering growth and dividends.

The dividend currently stands at a healthy 3.1%, is covered over 2.5x by earnings per share (EPS) and looks set to grow over the coming years. The forecast price-to-earnings (P/E) ratio is 12.3 so the company is priced fairly based on current performance. The opportunity for me lies in the online clothing market – with the first of the internet generation heading towards middle age, I expect to see even more growth for Next, which has done very well to adjust towards online sales.

Ex-growth or buying opportunity?

By contrast this has been a bad year for Superdry with the share price at the time of writing currently sitting at £11.35, nearly half of what it was in January. The reason? Profit growth was forecast to drop into high single figures; however, with a forecast P/E ratio of 10.3 and a dividend of 3.4% covered nearly 3x by EPS, Superdry is starting to look like a bargain, especially if it can successfully move the majority of its sales online. E-commerce revenue grew by 25.8% in 2018 so I think there is still plenty of growth potential in this company. For me, this shows that the fall in share price has more to do with frustration at the management than the brand going ex-growth.

The problem has been that Superdry’s management are still opening new stores despite margins being strangled and surging online sales. Despite this, Superdry has a rock-solid balance sheet as well as a recognisable brand, which should act a defensive moat in difficult times. And although management has made a few mistakes in the past year, it should only take a few changes for this share to deliver massive growth again.

For me, the recent falls in both Next and Superdry’s share prices have created great buying opportunities with the market uncertainty now priced in. In addition to their healthy dividend policies, I expect both of these stocks to produce good growth from online sales over the coming years.

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.

Robert Faulkner has no position in any of the shares mentioned. The Motley Fool UK has recommended Superdry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Google office headquarters
Investing Articles

1 reason I like buying S&P 500 shares – and 1 reason I don’t

Will this investor try to improve his potential returns by focusing more on S&P 500 shares instead of British ones?…

Read more »

Young woman holding up three fingers
Investing Articles

3 SIPP mistakes to avoid

Our writer explains a trio of potentially costly errors he tries to avoid making when investing his SIPP, on an…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Here’s how (and why) I’d start buying shares with £25 a week

Our writer uses his investment experience and current approach to explain how he would start buying shares on a limited…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s my 5-step approach to earning passive income of £500 a month

Christopher Ruane explains the handful of steps he uses to target hundreds of pounds in passive income each month.

Read more »

Investing Articles

2 UK shares I’ve been buying this week

From a value perspective, UK shares look attractive. But two in particular have been attracting Stephen Wright’s attention over the…

Read more »

Investing Articles

A lifelong second income for just £10 a week? Here’s how!

With a simple, structured approach to buying blue-chip dividend shares at attractive prices, our writer's building a second income for…

Read more »

Investing Articles

Here’s how I’d use a £20k Stocks and Shares ISA to help build generational wealth

Discover how our writer would aim to turn a £20k Stocks and Shares ISA into a sizeable nest egg by…

Read more »

Investing Articles

Billionaire Warren Buffett just bought shares of Domino’s Pizza. Should I grab a slice?

Our writer takes a look at a few reasons why Domino's Pizza stock might have appealed to Warren Buffett's Berkshire…

Read more »