Can Petrofac Ltd's (LON: PFC) total return beat the wider market?
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 Petrofac (LSE: PFC), which provides services to the oil and gas industry.
With the shares at 1340p, Petrofac's market cap. is £4,635 million.
This table summarises the firm's recent financial record:
|Year to December||2008||2009||2010||2011||2012|
|Net cash from operations ($m)||508||1,185||106.29||1,263||(401)|
|Adjusted earnings per share (cents)||78.03||104.78||127.76||159.01||185.55|
|Dividend per share (cents)||25.4||35.8||43.8||54.6||64|
Recent contract wins in the Middle East should contribute to Petrofac's ongoing earnings momentum; although the figures in the table demonstrate that contract payment conditions can sometimes keep the cash tied up. Indeed, there are large negative numbers in last years cash flow accounts for items such as 'long term receivables from customers', 'accrued contract expenses' and 'trade and other receivables'. In fact, Petrofac has moved into a net-debt position after a period of enjoying net cash on its balance sheet.
Such issues are of little concern as long as the money eventually comes in and the directors seem confident of that. Despite the bumpy cash-flow record, Petrofac has grown rapidly in its 30-odd year lifetime servicing a booming worldwide oil and gas industry. The statistics are impressive, from a standing start with less than 30 employees, the company now employs around 16,500 in 29 countries working on both on- and offshore engineering, construction and consultation projects.
Recent share price weakness meets a positive outlook to make me optimistic about the firm's total return prospects.
Petrofac'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 almost three times. 4/5
2. Borrowings: net debt is around 13% the level of operating profit. 4/5
3. Growth: cash flow has struggled to keep up with steadily growing revenue and earnings. 3/5
4. Price to earnings: a forward nine understates growth and yield expectations. 5/5
5. Outlook: satisfactory recent trading and an optimistic outlook. 4/5
Overall, I score Petrofac 20 out of 25, which encourages me to believe the firm has potential to out-pace the wider market's total return, going forward.
This is a high-scoring set of quality and value indicators and the only question mark hangs over the growth record thanks to fluctuating cash flow. Overall, I think I should invest in Petrofac.
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> Kevin does not own shares in Petrofac Ltd.