Can John Wood Group PLC's (LON:WG) 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 (UKX) 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 John Wood Group (LSE: WG), which is an international energy services company providing the oil & gas and power generation industries with engineering design, production support and industrial gas turbine services.
With the shares at 791p, Wood's market cap is £2,920 million.
This table summarises the firm's recent financial record:
|Year to December||2007||2008||2009||2010||2011|
|Net cash from operations ($m)||233||241||432||303||166|
|Adjusted earnings per share||38.3cents||53.7c||43.1c||41.1c||62.3c|
|Dividend per share||7c||9c||10c||11c||15.3c|
Wood Group employs more than 41,000 people in around 50 countries to provide services for the oil & gas and power generation markets. That involves engineering, procurement and construction management, facility operations & maintenance, and repair & overhaul of turbines and other high-speed rotating equipment.
The firm's participation in up-and-coming markets, like renewables and the shale regions, is encouraging. Coupled with the recent positive outlook, I think that bodes well for the prospects of the company's total return, going forward.
Wood Group'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 2011 dividend over four times. 5/5
2. Borrowings: net gearing was around 5% at the last count. 4/5
3. Growth: revenue and earnings have been lumpy; cash flow has been declining. 2/5
4. Price to earnings: a forward 13 compares well to growth and yield forecasts. 5/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score Wood Group 21 out of 25, which encourages me to believe the firm has potential to outpace the wider market's total return, going forward.
Although cash flow has been trending down, adjusted earnings cover the dividend well, and the outlook is promising. Wood's services are in demand in 'hot' energy-business areas around the world and, taken with the seemingly undemanding valuation that the shares place on the company, I think that, yes, I should invest in Wood Group.
If we want to achieve superior investment returns as investors, it makes sense that we should seek out superior investment opportunities. Keeping a keen focus on a company's ability to deliver a superior total return is one way of doing that. Indeed, step four in the Motley Fool's report "Ten Steps To Making A Million In The Market" asserts that 'shares beat funds' and I think that is good advice, particularly if you are targeting superior total returns. In fact, I recommend the report for any ambitious investor. Click here to download it while it is still free and you can find out the other nine steps recommended that could transform your wealth.
> Kevin does not own shares in Wood Group.