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 during recent weeks I’ve looked at Carnival (LSE: CCL), The British Land Company (LSE: BLND), Tullow Oil (LSE: TLW), Resolution Ltd (LSE: RSL) and Royal Bank of Scotland Group (LSE: RBS). This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of 5):
| Share | Carnival | British Land |
Tullow | Resolution | RBS |
|---|---|---|---|---|---|
| Dividend cover | 3 | 5 | 5 | 3 | 1 |
| Borrowings | 1 | 3 | 4 | 5 | 1 |
| Growth | 1 | 3 | 4 | 3 | 3 |
| Price to earnings | 2 | 3 | 3 | 4 | 3 |
| Outlook | 3 | 4 | 5 | 5 | 3 |
| Total (out of 25) | 10 | 18 | 21 | 20 | 11 |
Cruise ships
When I looked at cruise operator Carnival the cyclical nature of the company’s business put me off investing. Owning and maintaining cruise ships takes a lot of capital and that fact seems to show in firm’s debt burden. Carnival owns most of the world’s top cruise brands such as Carnival Cruise Lines, Holland America Line, Princess Cruises, Seabourn, P&O Cruises and Cunard. However, I think there are easier ways to make a living, and therefore easier ways for investors to earn total returns.
Commercial property
British Land focuses on what it calls high quality UK retail locations and London offices. The firm aims to drive up rents and capital values by investing in good quality buildings in prime locations, then managing them to a high standard. It’s a cyclical business, and I’m optimistic that investors could see upside gains in total returns as the economic cycle continues to unfold. I’m tempted to buy.
Oil and gas
Gifted oil and gas explorer Tullow has done very well with the drill bit over the years and now sits on a chunky asset base. With the shares off their highs, and with around 20 wells still scheduled for drilling by year-end, I’m likely to be a buyer. Indeed, so far during 2013, the firm has drilled some 27 wells with an impressive 63% success rate.
Insurance
Since acquiring Friends Provident Group plc, the majority of AXA UK life insurance, and Bupa Health Assurance, and rebranding the combined operation as the Friends Life Group, Resolution has been performing well as an insurance company. When I looked at the company, an impressive set of quality and value indicators, good recent trading and a positive outlook convinced me that I should buy the shares. The recent interim results were impressive and served to underpin my conviction.
Banking
Post financial crisis, an emasculated Royal bank of Scotland has focused on simplification and efficiency. A recent return to profitability signals some progress with the restructuring plans but although RBS is currently trading well below its net asset value, I reckon it needs to prove itself with consistent earnings and positive cash flow before the share price is likely to lift substantially. I’m neutral on the firm’s total-return prospects from here. If I didn’t own some of the shares already, they would probably stay on my watch list.
What now?
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> Kevin does owns shares in Royal Bank of Scotland but not in the other companies mentioned.
