Dividends payout

NEXT PLC would Earn You 306% Return Since 2003 – Case Study

The lesson here is to understand why you could achieve a 306% return with NEXT PLC.

Imagine you invested in NEXT PLC back in 2003 with an initial seed money of £10,000, what will you receive from the business in 13 years?

The answer is on the table below: –

NEXT's Dividends time table

Source: NEXT’s annual reports.

From the initial investment of £10,000, you get £7,934.24 in gross dividends or 79.4% of your initial investment. The latest dividend payout in 2016 is £1,966.77, that is a 20% dividend yield from your original investment.

However, NEXT’s management has a strong belief in its operations that they implement a buyback of shares from shareholders (to appreciate its share price). The result leads to NEXT’s share issue collapsing from 286.7m to 150.7m, and this reduction saw investors holds fewer shares while receiving a capital return for them.

For instance, back in 2003, £10,000 would buy you 992 shares in NEXT PLC @ £10.08/share, and 13 years later, you are left holding 522 shares. Therefore, the share buyback resulted in £11,430 during this period.

Your remaining holdings is worth £20,358 (calculated at £39/share). So, the original investment produce £20,358 + £19.3K = £40.66K. And the “% profits” is £40.66k minus £10k = £30.66k or 306%!

 

Breaking Down the 306% Return

306% looks like a big number, but the achievement is over a 13-year period. The key question to ask is: What is this equivalent on an annualised basis?  

Using compound interest, NEXT produced 11.4% annual return for shareholders. How does this compare to other asset classes?

 

  1. Well, if you were to give £10,000 to the hedge fund community you would have gotten 8.6% per year (measured over a 20-year period).
  2. The banks are no good, as savings rates are barely more than 2% in the last 5 years and, before the financial crisis savings were close to 5%, still far below the 11% by holding NEXT’s shares.
  3. What about the booming property market?

       First, £10,000 would not buy you a new home in 2003 (the average price is £136,000). Let’s say you are an investor with a dozen other people, then using Nationwide House Price Data, your share of the average property in the UK today is worth £14,588 or 2.9% per year.

  1. What about Gold?

 

Gold price chart since 2003

Source: Macrotrends.net.

Surprisingly, you would have done better with the yellow metal, as an investment in 2003 at $360 per ounce would grow to $1,211 per ounce. It would earn you a compound rate of 9.8% per year.

The gold price, measured in U.S. Dollars would result in a currency gain of 25% as the British Pound weaken from $1.65/GBP to $1.24/GBP.

 

Factors Attributing NEXT PLC The 306% Gained From Your Original Investment

  1. Operating profits grew from £301m to £868m in the 13-year period.
  2. A more crude measure of success is free cash flow increase from £97.3m to £469m.
  3. Since 2003, NEXT paid out £2.4bn in dividends to shareholders and bought back £3.9bn of shares from shareholders.
  4. The retailer generated returns between 30% and 50% of invested capital, a level greater than its cost of capital.
  5. NEXT’s net cash financing showed an aggregate cash outflow of £5bn since 2003 meaning shareholder returns came from internal operations and not financed by external investors and financial institutions.
  6. A 45% reduction in the issue of shares from 275m to 150m help boost its share price, as long as NEXT grew their earnings.
  7. Capital expenditure is maintained in the range of £100m to £180m in the last ten years and not spiralling out of control.
  8. Some of NEXT extraordinary performance is due to the increase in interest income from its credit card services at 24.99% APR. It represented 30% of total earnings.
  9. Establishing an online presence; – NEXT’s online sales contribute 40% of total sales and profits exceeded its retail division, therefore increasing its margins.

Meanwhile, Debenhams online presence accounts for 17% of total sales and declining earnings.

Why, am I telling you this?

Because, if you bought Debenhams stock price back in 2006 @ £2/share, you are nursing a loss of 65% on original investment.

 

Finally, let me know about other factors which have a long-term positive impact on a company’s share price.

 

Disclosure

The opinions are expressed independently by the writer for entertainment and research purposes and not taken as investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.

 

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