For the uninitiated, Next (LSE: LSE) is a share that appears to give oodles of bang for investors’ bucks. Forecasts of a 6% earnings uplift in the financial year to January 2020 might not be spectacular, but it’s a testament to the City’s belief in the robustness of Next’s online operations.
This estimate also leaves it trading on a cheap forward P/E ratio of 13 times. And predictions of more profits growth translates to expectations of expanding dividends as well, creating an inflation-beating 2.8%.
But as anyone who has been burnt in the past will attest to, stock investing happens in the real world and not on paper. In reality, Next is a FTSE 100 share that’s loaded with risk.
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It’s why sellers outweighed buyers following half-year financials released on Thursday, even as the retailer affirmed its full-year guidance for pre-tax profits to edge fractionally higher to £725m.
Hazard lights
Instead, market makers have been spooked by news that trading’s been softer in September, weakness which has been attributed to unfavourable weather that’s hit demand for its seasonal (autumn/winter) ranges. However, speculation is rife that the firm’s starting to struggle amid the broader mire enveloping the retail sector as well.
Sluggish September isn’t the only thing spooking investors this week, though. Along with those interims, the retailer also released its ‘Brexit Preparation and Impact Analysts’ in which it warned of the risks associated with a no-deal withdrawal.
In particular, Next advised that queues and delays at UK and European Union ports presents a ‘high’ risk to the business, while likely sterling weakness in the event of a disorderly exit, and the subsequent rise in the cost of overseas goods, creates a ‘medium’ risk.
Anyone with even a passing interest in political events will know we’re fast approaching a cliff-edge Brexit on 31 October. The bookies now have this as the most-likely scenario at 3/1. And this clearly has the potential to create huge profits damage at the retailer for both the near term and beyond.
6% dividend yields
So why take a risk with Next when there’s a sea of other great blue-chips to choose from? Take WPP (LSE: WPP) as an example.
The global advertising giant’s been locked in stasis in recent years but, thanks to the fresh broom that new management’s been sweeping through the company, things are beginning to look very bright indeed.
A stream of new business wins and contract extensions in the second quarter helped sales for the period charge past all expectations, and underlines the renewed confidence that global blue-chips have in WPP during the post-Sorrell era.
There’s genuine reason to expect business to keep improving too, as it strengthens its position in explosive growth areas like digital.
At current prices, WPP trades on a bargain forward P/E ratio of 10.1 times and carries a monster 6% corresponding dividend yield.
So forget about the 30% earnings dip City brokers are slating for 2019, I’d buy the business on the back of its exciting turnaround plan and those exceptional numbers. It’s certainly a better buy than Next today.
