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Should I Invest In William Hill Plc?

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 William Hill (LSE: WMH), the bookmaker (betting company).

With the shares at 410p, the company’s market cap. is £3,550 million.

This table summarises William Hill’s recent financial record:

Year to December

2008

2009

2010

2011

2012

Revenue (£m)

964

998

1,072

1,137

1,277

Net cash from operations (£m)

210

170

224

242

294

Adjusted earnings per share

29.59p

19.11p

20.13p

22.45p

27.27p

Dividend per share

5.08p

6.96p

7.7p

8.9p

10.39p

Last year, William Hill earned around 59% of its operating profit from traditional, retail betting shops here in the UK. It’s a business model that goes back generations. Indeed, my own grandfather scuppered any chances of passing me an inheritance with his frequent visits to the ‘bookies’, to bet on the horses, back in the first half of the twentieth century!  

That personal anecdote conveniently highlights the fundamental attraction for investors here — betting is addictive. People do it, and they keep coming back for more. Such repeat-purchase credentials bode well for investor total-returns.

The firm’s US and corporate operations delivered a small loss during 2012, but the director’s reckon the recent acquisition of Sportingbet‘s Australian and Spanish businesses lays the foundations for growth in the attractive Australian market. Based on past form, I’d say that there’s every chance of the firm succeeding abroad. Gentlemen, place your bets!

William Hill’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 last year’s dividend around 2.6 times.  4/5

2. Borrowings: net debt is running at around 2.4 times the level of operating profit.  3/5         

3. Growth: growing cash flow supports rising earnings and revenue.  5/5

4. Price to earnings: earnings’ growth and yield expectations supported a forward 13.  3/5

5. Outlook: recent disappointing trading and an optimistic outlook.  3/5

Overall, I score William Hill 18 out of 25, which encourages me to believe the firm has some potential to outpace the wider market’s total return, going forward.

Foolish summary

Decent dividend cover from earnings, manageable borrowings, and a record of growth are all attractive features. However, the valuation looks fair, meaning the shares are not in the sale basket.

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> Kevin does not own shares in William Hill.