Last week, Marks and Spencer (LSE: MKS) shares surged after a superb set of results for full-year 2022.
After the former Dividend Aristocrat announced it would resume dividend payments this year, the stock leapt 15% up to a 15-month high.
The share price now sits at £1.81. But I think there’s a real chance M&S could climb towards previous highs of over £7 and return to the FTSE 100 index.
Latest earnings
Let’s start by looking at the highlights of that earnings update.
Revenue up 9.6% year-on-year to £11.9bn
Pre-tax profit up 21.4% to £475.4m
Clothing & Home sales grew 11.2%, Food sales 8.7%, International sales 11.2%, Ocado Retail sales were down 1.2%
The dividend planned to resume in November
The outlook is for further revenue growth
Strong numbers from the domestic Clothing & Home and Food segments – which account for 60% and 30% of total revenues, respectively – drove much of the good news here.
Clothing & Home may have benefited from the disappearance from Britain’s high streets of some other chains. Meanwhile, Food sales increased thanks to a 40% rise in M&S’s budget Remarksable line. Neither of these rises seem like a flash in the pan.
And most impressive, this comes against a backdrop of a cost-of-living crisis. Other retail chains have watched margins and profits falter recently.
The UK’s ‘most trusted brand’
It’s worth remembering at this stage that Marks and Spencer has been a British success story for decades.
The company was a founding member of the FTSE 100 in 1984 before dropping to the FTSE 250 in 2019. And it was famously the first retailer to record a pre-tax profit of over £1bn in 1998.
Its name has a reputation that stands strong to this day. In 2022, a Yougov poll listed M&S as the “UK’s most trusted brand” above IKEA, Samsung, Netflix and Cadbury’s.
Dividend Aristocrat
The retail chain paid its shareholders weighty dividends too, reaching Dividend Aristocrat status for its consistent payouts. The firm offered yields between 5.15% and 7.68% from 2016 to 2019.
It then cut the dividend because of the pandemic. But now, debt levels are modest despite Covid’s impact, so this may have been a smart move.
For these reasons, I think M&S looks well-placed for the future. And at the current market cap of £3.6bn, it’s close to the lower end of the FTSE 100.
Am I buying?
If I bought today, I’d be looking at a price-to-earnings ratio of just under 10. Competitors like Tesco (27.1), Sainsbury’s (32.3) and Next (11.3) are all more expensive relative to earnings.
And the day after last week’s earnings, Deutsche Bank came out with a price target of £2.35, also claiming Marks and Spencer was heading back to the FTSE 100.
But are there risks? Well, the partnership with online retailer Ocado disappointed with a loss of £29.5m. That came after a £13.9m loss the year before.
Online food sales could be a useful headwind, so I’ll be paying close attention to the firm’s plan of a ‘reset’ in this area.
All in all, if I had spare cash to invest, I think I’d put some of it into this stock.
The post I’d buy Marks and Spencer shares before it returns to the FTSE 100 appeared first on The Motley Fool UK.
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John Fieldsend has positions in Ocado Group Plc. The Motley Fool UK has recommended J Sainsbury Plc, Ocado Group Plc, and Tesco Plc. 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.
