Can Wolseley plc's (LON: WOS) 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 Wolseley (LSE: WOS), which is the world’s largest trade distributor of plumbing and heating products and a leading supplier of building materials.
With the shares at 2951p, Wolseley's market cap. is £8,100 million.
This table summarises the firm's recent financial record:
|Year to July||2008||2009||2010||2011||2012|
|Net cash from operations (£m)||1,028||1,008||744||(196)||642|
|Adjusted earnings per share||56.58p||95.5p||73.9p||141.8p||166.7p|
|Dividend per share||11.25p||0p||0p||45p||60p|
Although probably best known for its Plumb Center brand in the UK, Wolseley's operations focus on distribution in six geographic regions. The firm is wholesaler to plumbers and builders in the USA, where it derived 48% of revenue last year, the Nordic region, which delivered 16%, the UK, 13%, France, 10%, Canada, 7%, and Central Europe, 6%. Those revenues come from markets such as new residential, maintenance and improvement, and commercial, industrial and construction.
The problem with those markets is that they are inherently cyclical, and Wolseley smacked its nose against the credit crunch whilst clinging to around £2.5bn of net debt. As sales volumes declined, the firm raised £1 billion during 2009 with a dilutive share placing.
Since then a focus on cash flow and margin preservation, which included branch closures for underperforming outlets, has seen the company transform its balance sheet and virtually eradicate its debt. Wolseley has used its improved financial strength to reward investors with dividends and to progress its acquisition policy, which has been helping the firm to gain seemingly ever-increasing market share. If maco-economic conditions remain stable, investors could see a decent total return from current levels, despite a share price that has recently staged a muti-bagging recovery from its 2010 nadir.
Wolseley'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 gearing of about 3% with net debt around 20% of underlying earnings. 4/5
3. Growth: growing earnings, against flatter revenue and cash flow that's coming back.4/5
4. Price to earnings: a forward 13.7 compares well to growth and yield forecasts. 4/5
5. Outlook: satisfactory recent trading and a cautiously positive outlook. 4/5
Overall, I score Wolseley 20 out of 25, which encourages me to believe the firm has potential to out-pace the wider market's total return, going forward.
Wolseley's focus on cash and profit generation shows up in the scoring. Underlying earnings cover the dividend well, and the firm has paid off most of its previous debt. Earnings and cash flow have been growing and, to complete the turnaround story, the valuation appears to understate the firm's forward prospects. That said, things could change rapidly in the event of another downturn in demand.
Overall, as the shares have had a good run, I'm happy to put Wolseley on my watch list for the time being and may buy if forward events conspire to worry investors and weaken the share price. That's exactly what has happened with one company, and I recommend you check it out. One of the Fool's top investment writers has put his money where his mouth is by investing. He believes it is the "Motley Fool's Top Growth Share for 2013". In this new 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 and tells you exactly why our expert has invested in, and expects strong growth from, this changing company with a strong pedigree. To get your copy, click here.
> Kevin does not own shares in Wolseley.