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 Resolution (LSE: RSL), the insurance company.
With the shares at 328p, Resolution’s market cap. is £4,505 million.
This table summarises the firm’s recent financial record:
|Year to December||2009||2010||2011||2012|
|Net cash from operations (£m)||544||980||(76)||1,198|
|Adjusted earnings per share||137.09p||30.85p||50.43p||19.84p|
|Dividend per share||2.72p||18.03p||19.89p||21.14p|
Since its establishment in 2008 with the aim of acquiring and restructuring financial services companies, Resolution Limited acquired Friends Provident Group plc, the majority of AXA UK life insurance, and Bupa Health Assurance, and rebranded the combined operation as the Friends Life Group.
However, the wheeler-dealer nature of the company’s philosophy has since softened, and it now appears to see itself as a plain-vanilla life insurance company, focused on providing good service to underpin a sustainable business that it plans to keep. There is a firm focus on cash generation, which the directors expect to drive future dividend progression.
I’m optimistic about Resolution’s total-return prospects and look forward to finding out more with the interim results due on 13th August.
Resolution’s total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: free cash flow covered last year’s dividend around 1.17 times. 3/5
2. Borrowings: at the last count, there was net cash on the balance sheet. 5/5
3. Growth: strong cash flow supports flat-looking revenue and recently fallen earnings. 3/5
4. Price to earnings: a forward 12 compares well with growth and yield expectations. 4/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score Resolution 20 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return going forward.
The firm’s focus on value creation is beginning to show up with a decent set of numbers against my business quality indicators. Recent good trading and a positive outlook encourage me to believe that, yes, I should invest in Resolution Ltd.
But the insurance industry has commodity-like characteristics, so I do worry that Resolution’s success might be too reliant on talented management. Indeed, companies with seemingly impregnable, moat-like financial characteristics can be hard to come by, which is why I’m enthusiastic about a new Motley Fool report, prepared by our top analysts, that highlights five such shares. “5 Shares To Retire On”, presents five shares that deserve consideration by investors aiming to build wealth in the long run. For a limited period, the report is free. I recommend downloading your copy now by clicking here.
Kevin does not own shares in Resolution Limited.