10 Years of Market-Thrashing Returns
04/26/2013 7:00 am EST
This UK stock has one of the country's best investing records of the last decade. But does it remain a good buy today? Maynard Paton of The Motley Fool UK shares his expert take.
Today, I'm going to share with you a few lessons from one of the very best investing records of the last ten years.
Take a look at the following table. It shows a series of share purchases since 2004:
Jan. Price paid
The share in question currently trades at £43. I don't know about you, but I'd be chuffed with that sort of investment performance.
In fact, I calculate the compound returns from those purchases range from 13% up to 37% a year—which naturally knock the comparable performance of the FTSE-100 into a cocked hat.
Sadly, it wasn't me who achieved those gains. Nor was it another ordinary investor. And it wasn't a City fund manager, either. In fact, it wasn't an individual at all. Those returns were actually achieved by a company—Next (London: NXT).
A £2 Billion Buyback Belter
You see, those share purchases reflect the buybacks the fashion chain has made during the last ten years or so. My sums tell me the company spent more than £2 billion on share buybacks during the last decade, buying 126 million shares at an average price of nearly £18.
With the share price now £43, I think it's fair to say that £2 billion has since more than doubled in value. A 44% reduction to the share count has helped Next's dividend triple during the last ten years, too.
Lessons We Can All Learn
After studying Next and its master buyback achievements, I drew a few conclusions for us Foolish investors:
1. No need to always look for new ideas: Next didn't waste its cash buying lots of different and unfamiliar companies to reward shareholders. Instead, it focused on investing in the business it knew best—its own.
That philosophy can work for us as well, as often you don't need to keep finding fresh opportunities to achieve superb returns. Sometimes, the best buying opportunities for new money may be familiar names already in your portfolio.
2. Develop some investing rules: Next followed a simple set of rules to ensure its buybacks were effective. In particular, its rules included using only surplus cash flow—and not taking on extra debt—to repurchase shares.
By developing a set of sensible guidelines, we too should become more efficient with our stock picking. We could start by taking a lead from Next's rulebook, and track down companies generating surplus cash and not taking on extra debt.
3. Buy growth at a reasonable price: Even with quality shares, we should always take care not to overpay for future growth.
Importantly, Next did not buy back its shares at any old price. I reckon the company paid anywhere between nine and 12 times near-term earnings, which seems very good value when you consider earnings per share have tripled since 2004.
Should You Buy Next?
True, the multi-dip recession in the UK, the rise of online shopping, and high rent levels have crippled many retailers of late. Yet Next has prospered, and provided wonderful returns to those who spotted the group's progress and could look beyond the sector gloom.
So the question now, I guess...should you buy Next?
I asked Nate Weisshaar, a senior analyst at Motley Fool Share Advisor, for his view...and he told me the shares presently trade at 13 times forecast earnings—above the nine to 12 range Next itself has found to produce handsome rewards for buyers.
So perhaps this share is one to put on your watch list, at least for the moment.