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Should I Invest In TUI Travel 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 TUI Travel (LSE: TT), the travel firm and tour operator.

 With the shares at 363p, TUI Travel’s market cap. is £4,056 million.

This table summarises the firm’s recent financial record:

Year to September 2008 2009 2010 2011 2012
Revenue (£m) 13,932 13,851 13,514 14,687 14,460
Net cash from operations (£m) 378 218 520 613 502
Adjusted earnings per share 20.4p 20p 19p 23.6p 25.8p
Dividend per share 9.7p 10.7p 11p 11.3p 11.7p

With a hand in most aspects of the typical holiday experience, TUI Travel owns many popular holiday brands and derives the great majority of its business from Europe. But holiday booking tends to wax and wane with the economic cycles, and a glance at TUI’s share-price chart shows the volatility that results.

In 2011, the shares were around a third of the 363p or so they command today. They’ve had a good run and, despite the firm’s recent good financial performance and rosy outlook, that makes me nervous about total-return potential from here.

TUI Travel’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 earnings around 2.2 times. 4/5

2. Borrowings: net debt is running at around 3.5 times the level of operating profit.  2/5        

3. Growth: robust cash flow supports growing earnings derived from flat-looking revenue. 4/5

4. Price to earnings: a forward 11 seems to recognise growth and yield expectations. 3/5

5. Outlook: good recent trading and a positive outlook. 5/5

Overall, I score TUI Travel 18 out of 25, which encourages me to believe the firm has some potential to out-pace the wider market’s total return, going forward.

Foolish Summary

Decent dividend cover, high-looking debt and a recent record of growth all look fairly priced by the P/E rating. There is no obvious bargain here, despite the rosy outlook.

TUI Travel's cyclical nature puts me off investing at this stage, but I'm still hankering for growth, which is why I'm attracted to a share that one of the Fool's top investment writers believes is the "Motley Fool's Top Growth Share".

In this timely 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. To get your copy, click here.

> Kevin does not own shares in TUI Travel.