Can Compass Group plc's (LON: CPG) 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 Compass Group (LSE: CPG), which provides contract catering and support services in several sectors.
With the shares at 810p, Compass Group's market cap. is £14,850 million.
This table summarises the firm's recent financial record:
|Year to September||2008||2009||2010||2011||2012|
|Net cash from operations (£m)||662||833||1,053||964||1,048|
|Adjusted earnings per share||22p||30p||35.7p||39p||42.6p|
|Dividend per share||12p||13.2p||17.5p||19.3p||21.3p|
In a recent update, Compass said that business is positive in North America, which delivered 45% of the company's revenue last year, negative in Europe and Japan, which contributed 37%, and strong in fast-growing and emerging markets, which accounted for about 18% of revenue. That means that around 63% of the firm's business is growing strongly: North America showing growth between 5% and 10% annually, and emerging markets with growth well into double figures.
With over 508,000 employees in around 50 countries, Compass has grown both organically and through acquisition. The firm focuses on food service, but also provides related services like cleaning and accommodation management, for example. Emerging markets, which includes countries such as Brazil, Turkey and South Africa, are increasingly important to forward growth expectations, and if such growth can continue to generate free cash flow, the firm's total return prospects look encouraging.
Compass 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 last dividend twice. 4/5
2. Borrowings: net gearing of 33% with net debt around 1.3 times earnings. 4/5
3. Growth: revenue and earnings have been growing against flatter cash flow. 4/5
4. Price to earnings: a forward 16 looks full compared to growth and yield forecasts. 2/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score Compass 19 out of 25, which encourages me to believe the firm has some potential to out-pace the wider market's total return, going forward.
With borrowings under control, good recent trading and a positive outlook, growth looks set to continue. But a lot of expectation seems built into the share price and that shows up in the price-to-earnings score. The twice-covered dividend has a forward yield of about 3.2%. That's not bad, but it's not enough to tempt me into investing in Compass right now.
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> Kevin does not own shares in Compass Group.