The FTSE 100’s Next (LSE: NXT) shares are backed by what shows up on investment screens as a ‘quality business’.
The company operates as a hybrid fashion/lifestyle retailer with both internet and traditional store sales. And it’s a well-known presence on the scene for clothing, footwear, accessories, beauty and home products.
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Good quality indicators
We can get an idea of the quality attributes of the enterprise by looking at some often-used indicators. For example, the return on capital is running at about 35%. And the business enjoys an operating margin running just above 19%.
On top of that, the company has a steady financial and trading record, although the figures made a deep dive when the pandemic hit. But that’s unsurprising for a retailer given the severe shock to the entire sector at the time.
In short, Next is perhaps a desirable stock for investors to hold in a diversified long-term portfolio. And one of the only questions left to consider is valuation. After all, even quality businesses can make poor investments if we pay too much for them.
But does quality investing really pay? And have Next’s undeniable attributes worked to preserve the wealth of its shareholders over the past five troubled years? Here’s the spoiler – yes, they have!
Five years ago, we could have picked up some of the shares for around 4,614p each. And as I write on Thursday 2 March, they are changing hands at 6,874p. So that’s a gain on the share price of 2,260p.
But that’s not all. The company has a pretty good dividend record. And over the period, shareholders would have collected payments worth a total of 790.5p per share. So that can be added to the share price increase to give a total gain of 3,050.5p per share, or around 66%.
A tough year ahead
Therefore, £1,000 investment in Next shares five years ago would now be worth around £1,660. Although trading costs would shave a little off that return if it were to be fully cashed in by selling the shares now.
Nevertheless, Next has performed like the stalwart it is and would have been a decent buttress in a portfolio through difficult times.
And, looking ahead, it seems likely the business will deliver more for its shareholders over the long term. Although nothing is guaranteed, because even quality enterprises with a strong trading niche can run into operational difficulties from time to time.
Nevertheless, a trading statement delivered on 5 January was upbeat. At the time, the business had just experienced better-than-expected sales through the Christmas period. Although directors also expressed caution for the year ahead ending in January 2024.
Their best estimate was that full-price sales would likely end the year down by 1.5%. And they anticipated a year-on-year slide in profit before tax of about 7.6%. Meanwhile, City analysts expect earnings to decline by about 10% this year.
Investors may like to dig in with their own deeper research now. And we’ll get another update from the company with the full-year results report due on 29 March.
