It’s hard to believe that it was more than 10 years ago that Simon Wolfson, more formally Lord Wolfson of Aspley Guise, the chief executive of Next (NXT), explained how the company decides whether to buy back its own shares or issue a special dividend – and it’s remarkable how his rules have stood the test of time.
Buybacks make sense when Next has surplus cash, but what if the company has debt? Next has a cardinal rule that buybacks should be funded from surplus capital, rather than through taking on more loans. Overborrowing could put the company’s credit rating under review; a downgrade would result in it having to pay higher interest rates, and its directors have no intention of risking that. They have maintained its long-term debt at £800mn for most of the past 10 years – there was an upward blip during lockdown, but this was well within its additional borrowing facility of £450mn.
The directors also say that they’ll only buy back shares when the core business is expected to grow in the long term. The surplus cash is what’s left after Next’s bolt-on acquisitions of struggling brands (such as Fatface, Cath Kidston, made.com and Joules) and after taking major stakes in others (eg, Reiss, Gap UK and Victoria’s Secret UK) to add to its online offering. The key priority is to support future growth with capital investments, which include funding for IT, warehouses, systems, stores and its recently launched “Total Platform” that allows other brands to offer ecommerce through Next’s IT, warehousing and distribution infrastructure.