To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.
So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at Vedanta Resources (LSE: VED), the natural resources company.
With the shares at 1173p, Vedanta’s market cap. is £3,126 million.
This table summarises the firm’s recent financial record:
| Year to March | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue ($m) | 6,579 | 7,931 | 11,427 | 14,005 | 14,990 |
| Net cash from operations ($m) | 1,829 | 1,572 | 2,028 | 1,979 | 3,204 |
| Adjusted earnings per share (cents) | 108 | 199.2 | 262.8 | 142 | 133.1 |
| Dividend per share (cents) | 41.5 | 45 | 52.5 | 55 | 58 |
Much, but not all, of Vedanta’s operations are located in India. The region is incredibly important to the firm, delivering 63% of overall revenue last year. With China delivering a further 14% , it seems a bet on Vedanta means a bet on the continued growth of India and China.
Perhaps surprisingly for a firm often thought of as a miner, 40% of operating profits came from oil & gas production last year, despite that resource only providing 22% of revenue. Meanwhile, zinc production delivered 46% of operating profit for a 20% revenue contribution, and copper managed just an 8% profit contribution despite turning over 38% of revenue, which seems to show the havoc that volatile commodity prices cause resource companies like Vedanta.
So those three resources provide 80% of revenue, despite the firm also producing some copper, aluminium, electricity and iron ore. It’s worth pondering how those profit figures might look should commodity prices slip from here or, indeed, should they rise.
There are a couple of things I’d like to highlight to potential investors: firstly, the company’s founder and chairman, Anil Agarwal controls around 65% of the shares, which means he has a lot of power over what happens to the company, and your investment. Secondly, that the company has a lot of debt, which could be problematic if commodity prices do fall further.
Vedanta’s total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: adjusted earnings covered the recent dividend around 2.3 times. 4/5
2. Borrowings: net debt is running at about 5.7 times the level of operating profit. 1/5
3. Growth: growing revenue has led to robust cash flow and fallen earnings. 3/5
4. Price to earnings: a forward 10 or so seems up with earnings and yield expectations. 3/5
5. Outlook: satisfactory recent trading and an optimistic outlook. 4/5
Overall, I score Vedanta 15 out of 25, which inclines me to be cautious about the firm’s potential to out-pace the wider market’s total return, going forward.
Foolish Summary
Although debt seems high, Vedanta scores well on my remaining value and quality indicators. Investors taking the plunge now can expect to collect a forward dividend yield running at about 3.3%. That’s not enough to tempt me given the issues.
It’s always worth looking at cyclical resource companies like Vedanta to try to catch capital growth from the up-leg in the cycle. But I’m also attracted to a share that one of the Fool’s top investment writers has uncovered. He has put his money where his mouth is by investing and believes the share is the “Motley Fool’s Top Growth Share for 2013”.
In this new Fool report, you can discover how the firm has re-envisioned itself to allow for tremendous growth along new horizons. Right now, the report is free to download and tells you exactly why our expert has invested in, and expects strong growth from, this changing company with a strong pedigree. To get your copy, click here.
> Kevin does not own shares in Vedanta Resources.
