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Should I Invest In These 3 FTSE 100 Shares?

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 during recent weeks I’ve looked at International Consolidated Airlines Group (LSE: IAG), Glencore Xstrata (LSE: GLEN) and Royal Mail (LSE: RMG). This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of 5):

Share International
Airlines
Glencore
Xstrata
Royal Mail
Dividend cover 5 4 4
Borrowings 1 0 4
Growth 1 3 5
Price to earnings 3 3 4
Outlook 4 4 4
Total (out of 25) 14 14 21

Airline

Despite IAG’s CEO declaring that the firm’s Spanish arm, Iberia, performed badly during 2012, IAG shares have spent most of 2013 rising steadily. Improving demand and progress with the firm’s Iberia turnaround strategy have generated recent encouraging financial results and a move to profitability looks likely soon. IAG also has an eye towards expansion through acquisition, like 2012’s deal, which brought British Midland Limited to the group, along with some valuable long-haul slots at Heathrow airport. In 2013, Spanish low cost carrier Vueling was acquired. However, the industry is heavily cyclical and it’s hard to time a good investment entry point in a company like IAG.

Commodities

Highly indebted Glencore Xstrata is well diversified in terms of resources and geographical spread of its operations. The firm deals in zinc, copper, lead, aluminium, ferro alloys, nickel, cobalt, iron ore, crude oil, coal and agricultural commodities (softs). Expectations are that earnings will advance by around 30% during 2014. But that outcome depends largely on commodity prices and, in my opinion, that improved profit forecast is already in the price. I’m neutral with regard to total-return expectations, but I do see the debt here as a risk.

Deliveries

Since flotation, Royal mail shares have travelled mostly upwards. At today’s 563p share price, the expected dividend yield is running at about 3.6% and is likely to be covered above twice by underlying earnings. Meanwhile the trailing P/E rating is getting towards about 13.

The business itself has some attractions. For example, the growing trend of internet shopping generates plenty of parcels for the firm to deliver. However, there are some potential negatives. For example, the business is reliant on its workforce to execute its labour-intensive operations. That can lead to difficulties. Royal Mail staff recently voted to go on national 24-hour strike on 4 November. The half-year report, due at the end of November, will reveal how recent trading has been going. For this share, my main preferred indicator of value is dividend yield, so Royal Mail is not that attractive to me at current share-price levels.

What now?

Despite my reservations, Royal Mail is the pick of the bunch, and it is certainly the highest scorer against my business quality and valuation indicators, although the recent further share-price rise will drop the valuation score by one point.

I'm happy to watch Royal mail for the time being, but a well-researched Fool report has me enthusiastic about some firms with strong economic franchises and seemingly well-defended operating niches.

Our top analysts have prepared a report called  "5 Shares To Retire On", which analyses five shares that sidestep cyclical industry pressures. I recommend these five for your own due diligence and research, as they surely deserve consideration by investors aiming to build wealth in the long run. To download a copy click here.

Kevin does not own any of the shares mentioned.