Putting your shares in an ISA gives you an immediate advantage over most fund managers — you don’t have to pay tax. I like to focus my ISA on stocks I believe are likely to generate a lot of cash, most often through dividends.
One of the most recent additions to my personal ISA is fashion retailer Next (LSE: NXT). Shares in this one-time high flyer lost 45% of their value in 2016, as the firm’s growth ground to a halt. My view was that this sell-off was overdone, so I flagged the stock as a potential value buy.
Results rally
Sure enough, Next’s share price rallied strongly after the company published its full-year results last week. The stock has now risen by 8% in March. The figures showed that Next’s sales were broadly flat last year. Importantly, the firm’s operating margin also remained unchanged, at 20%. Despite the difficult trading conditions, a total of £502m of surplus cash was returned to shareholders.
Looking ahead, Next’s guidance seems encouraging to me. In order to compete with fast-moving online retailers, Next is adapting its design and sourcing process to deliver new designs more quickly as trends develop.
An impressive 97% of the group’s stores make an annual profit of more than 10%, which is very good for a high street retailer. Payback on new stores is just 24 months, and rental rates are falling on new leases.
I believe that gloomy predictions about Next’s future are mistaken. The stock currently trades on a forecast P/E of 10.7 with a prospective yield of 4.1%. In my view this represents an excellent entry point for a high quality business. I plan to add more shares to my existing holding before the end of the tax year.
A dividend friend for life?
Pets are for life, not just for Christmas. But what about retailer Pets at Home Group (LSE: PETS), whose shares have fallen by 25% so far this year? The main trigger for the group’s slide was a 0.5% fall in like-for-like merchandise sales during the third quarter. This was seen as bad news by analysts, because merchandise provides about 80% of the group’s profits.
I don’t deny this is disappointing, but I don’t think it’s a disaster. Pets at Home’s group revenue still rose by 4.4% during the third quarter, as new stores were opened. Like-for-like revenue across the group was 0.1% higher. So while growth is slowing, pet-owning customers are staying loyal to the business.
Indeed, customer loyalty is a key attraction for investors, in my view. Pets’ strategy is to combine in-store vet and grooming services with online and in-store sales of pet merchandise, including premium own-brand products like food.
The group’s belief is that by offering a seamless mix of services and products they can build a loyal customer base and a profitable business. I agree.
With the shares trading on a forecast P/E of 11.8 and offering a dividend yield of 4.2%, I believe the stock is attractive. I’m planning to buy shares in Pets at Home before the end of the tax year.
But if you’re not yet convinced, I do have some other suggestions that could make ideal tax-free investments.