3 reasons why the Next share price is one of my top FTSE 100 buys

Man holding magnifying glass over a document
Man holding magnifying glass over a document

In recent articles, I’ve highlighted some FTSE 100 stocks whose international operations mean that they’re unlikely to be affected by Brexit. But if you want to invest in UK businesses, where is the safest place to put your cash?

One company I think stands out as a potential buy is fashion retailer Next (LSE: NXT). The firm’s shares were trading at £60+ in July, but have fallen by around 25% since then as the market sell-off has gained pace.

At about £45 per share, I believe Next is starting to look very attractive. Here are three reasons why I’m tempted to add the shares to my own portfolio when I next go shopping for stocks.

1. Unusually profitable

Next is one of the most profitable retailers on the stock market. The group generated an operating margin of 18% last year. That makes it more profitable than almost any other listed UK retailer.

The firm also scores highly on another measure of profit, return on capital employed (ROCE). This compares operating profit with capital invested in the business. Next’s ROCE was 48.6% last year, which means it generated £486 of operating profit for each £1,000 invested in the business. That’s very impressive indeed.

2. Super management

A company that generates such high returns in a very competitive sector is likely to have good management. I believe Next’s team is among the best.

Not only do its managers run the business well, but they also communicate well with investors. After years of following this company, I know that its financial reporting and forecasts are unusually accurate and detailed. I’d be happy to trust my money to chief executive Lord Wolfson and his team.

3. Looking cheap

As I mentioned, Next stock has fallen by about 25% since July.

Trading at about £45, the shares have a forecast price/earnings ratio of around 10 and a dividend yield of 3.5%. Given the company’s high profit margins and low debt levels, I think that looks like good value.

Next is back on my buy list.

An unloved dividend champ?

Another company whose share price has fallen by about 25% this year is FTSE 250 housebuilder Redrow (LSE: RDW).

At first glance this £1.75bn firm looks cashed-up and fairly cheap. Run by founder and major shareholder Steve Morgan, the company delivered record profits last year and is expected to report a further increase for 2018.

Now trading on just 5.5 times forecast earnings and with a 6.3% dividend yield, this stock looks cheap, according to my colleague Rupert Hargreaves.

Strong trading

Last year, Redrow generated record sales of £1.92bn and a record pre-tax profit of £380m. The group finished the year with cash on hand, despite increasing the dividend by 65%.

However, record-breaking performances from cyclical businesses rarely last forever. At some point, market conditions will get tougher. The group’s profits may fall.

What’s next?

I don’t know when the market will turn. But I do know that Mr Morgan is retiring for the second time in March, 10 years after he re-joined in 2009. In my opinion, the best time to have bought Redrow shares would have been 10 years ago, since when they’ve risen by 375% and paid some generous dividends.

At current levels, housebuilders like Redrow only look cheap because earnings and asset values are at record highs. If house prices start to fall, these stocks could end up looking expensive.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Redrow. 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.