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Why I’d sell the Next share price to buy this FTSE 100 stock and its 10% dividend yield

Royston Wild
Businessman standing in front of screen

I believe there’s something perturbing about Next (LSE: NXT) and more specifically its share price ascent in 2019. Up almost two-thirds since the turn of January and currently dealing at its most expensive since February 2016, above £65, it’s an ascent which seems to fly in the face of the tough trading conditions Britain’s retailers are facing.

Next has performed more strongly than many of its high street and online rivals and this was illustrated perfectly in the FTSE 100 firm’s latest trading statement of October. In this it advised that full-price sales between August and October came in better than guidance and were up 2% year on year.

Still, with the UK economy on a clear downtrend as we head into 2020 – worsened by the Brexit saga which threatens to spread into the next calendar year at least – Next may find it difficult to keep its head above water, as it will likely become more difficult to separate consumers from their cash.

And its forward price-to-earnings ratio of 14.2 times, while broadly in line with the blue-chip average, doesn’t factor in the probability that things will get tougher and tougher. Indeed, I think that rocketing share price in 2019 leaves it in danger of a sharp reversal in the new year and I’d sell out of the retailer right away.

10%-plus yields

I’d be happy to use the cash to load up on Taylor Wimpey (LSE: TW) stock today. Rather, load up on more stock, given that I am an existing holder of the housebuilder’s shares.

At current prices, the Footsie firm is certainly more attractively valued than when I piled in several years ago. A recent price of 169p per share leaves it dealing on a bargain-basement, sub-10 forward P/E ratio of 8.3 times. And income chasers can relish a corresponding 10.7% dividend yield, one which sits at more than double the current blue-chip average.

Another perky update

Taylor Wimpey also updated the market last week and in a cheery statement advised that “housing market conditions have remained resilient” and that “in the second half, we continued to see good demand for our homes and have built a very strong order book.”

Sales rates in the year to date are up at 0.96 per outlet per week, Taylor Wimpey said, versus 0.81 in the same 2018 period. The rise reflected in part improved build capacity. What’s more, the firm’s total forward order book consisted of 10,433 homes as of 10 November compared with 9,843 homes a year earlier, pushing the value of the book 12.5% higher to £2.7b.

Taylor Wimpey said that strength in the second half has been underpinned by an array of factors, such as the support offered by a competitive mortgage rate market, rock-bottom interest rates and the Help to Buy purchasing incentive scheme.

And pleasingly, I don’t expect any of these catalysts to disappear any time soon, nor the palpable shortage of new homes which is driving strong underlying demand for the likes of Taylor Wimpey. This is why I expect the business to remain a big dividend payer well into the 2020s and probably beyond.

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Royston Wild owns shares of Taylor Wimpey. The Motley Fool UK has no position in any of the shares mentioned. 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.

Motley Fool UK 2019