First, let's quantify that generosity. In the five years 2011-16, Next has distributed over £2.8bn to shareholders by way of regular and special dividends plus share buybacks. That compares with a current market value of £5.5bn for the company's equity; it also means that for every £1 Next distributed in that five-year spell the share price has dropped £2 from its December 2015 peak. As I say, fat lot of use.
No matter, the company's directors plan to lay it on thicker. As part of the aim to distribute surplus cash generated from trading, Next intends to pay out a further £265m (or 180p per share) in the current financial year. Couple that with conventional dividends of, say, 158p and the shares offer an 8.7 per cent yield this year and, quite likely, similar levels in future years.
Investors continue to roll their eyes and concentrate on the foreseeable future for Next's trading, which isn't so pretty. Last month, Next's bosses said that the year just finished had petered out lamely and that pre-tax profit at £792m will nudge against the lower end of their forecasts.
Worse still are prospects for 2017-18. Customers' spending power and Next's prices are being affected by similar inflationary factors linked to sterling's decline. As a result, the directors reckon that sales may drop by as much as 4.5 per cent and are much more likely to fall than to rise. Factor in newer cost pressures, such as the government's apprenticeship levy, and pre-tax profit might be as low as £680m, which would be a 14 per cent fall on 2016-17's likely result; even the best-case scenario points to slightly lower profits. That would mean that, in 2017-18, profits will fall for the second year running - not what's expected of the UK's most successful non-food retail operation since Marks and Spencer (MKS) was the dominant player.
Thus we're witnessing a conventional falling-out-of-love scenario in the stock market when a former darling admits that it, too, is merely mortal and suffers the same shortcomings as all the rest. In response, disillusioned, lovelorn City analysts obsess over the dreary present and somehow manage to project that as the company's long-term future, too.
In so doing, they pay scant attention to what's dubbed a company's 'earnings power'. In a way, this is what the label says - the profits or earnings per share that a company is likely to earn, if not through thick and thin, then at least when the years are petit sized. Granted, there is always the chance of an especially anorexic year when profits fade to nothing; but that will be exceptional.
Earnings power attempts to quantify the yearly profit that a company could produce through a business cycle and is often best proxied by taking the average figure for the past five years. That's too Neanderthal for City analysts, but time and again it proves its worth because, first, it provides a more reliable indicator than futurology and, second, it brings the basis for a sound estimate of a company's value. And, at the end of the day, value is what it's about - buying a company's shares for usefully less than an estimate of what they are worth.
In the case of Next, that exercise pans out nicely. If earnings power equates to average free cash flow over the previous five years – that's the cash profit left over for shareholders - then Next's is something over £500m. Capitalise that at the best guess of Next's cost of capital (both debt and equity), deduct latest net debt from that figure and you are left with an idea of underlying value - in Next's case, of about £44 per share.
As proof that Next is a fairly mature business - over £4bn of annual sales, 730 stores and a long-established mail-order operation - capital spending is little more than depreciation. That limits the company's ability to create value in the future - my guesstimate is about another £1 per share in today's money. All told, therefore, the stab at value shows £45, almost 17 per cent more than the market price.
Equally important, £500m or so of free cash leaves about £330m after paying the conventional dividend. That is plenty to cover a special payout of 180p, which costs £265m. In other words, special payouts running at the proposed level would be sustainable, so should not diminish long-term value.
Also - and almost incredibly - monthly changes in Next's share price show a negative correlation to the Bearbull Income Portfolio over the past five years. Ostensibly, that's a big come-on, although it may be more a reflection of the acute weakness in Next's share price - these past 14 months its average monthly drop is 4.6 per cent. Which reminds me that, if I buy the stock, I'm flying in the face of the market's sentiment. Sure, even the market's strongest feelings can quickly flip, but do I want to be buying Next's shares now? Maybe. I'll deal with that as I round off this discussion next week.
