Should you buy these 2 dividend-paying growth stocks?

Man is shopping online with laptop

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.

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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.

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