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 Hammerson (LSE: HMSO), which is a commercial property company.
With the shares at 496p, Hammerson’s market cap. is £3,537 million.
This table summarises the firm’s recent financial record:
|Year to December||2008||2009||2010||2011||2012|
|Net cash from operations (£m)||30||73||72||77||75|
|Adjusted earnings per share||38.02p||19.7p||19.9p||15.5p||18.2p|
|Dividend per share||27.9p||15.45p||15.95p||16.6p||17.7p|
Having sold off its portfolio of London office assets last year, REIT Hammerson now focuses on retail property. Assets worth some £5.7 billion are spread between the UK and France, which include 20 prime shopping centres, 22 convenient retail parks and investments in 9 premium designer outlet villages, according to the company.
The fortunes of retailers ebb and flow with economic conditions and, largely, retail-property owning companies’ fortunes follow in lock step. Admittedly, property companies can survive, even thrive, through the full economic cycle by clever deal-making and slick operational execution, but when cash tills are running at break-neck speed to keep up with retail consumer demand, it’s inevitable that rent levels and property occupation rates will be at their highest.
Right now, Hammerson shares are trading at a roughly 10% discount to the firm’s asset value per share, but, as the economic cycle unfolds, I expect asset values and rents to rise, which could lead to a gently rising share price and an increasing dividend. Taking into account the forward dividend yield running at about 4% and the company’s recent progress, I’m optimistic about the firm’s total-return outlook from here.
Hammerson’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 just over once. 5/5
2. Borrowings: net gearing of 56% with interest covered around 2.7 times by earnings. 3/5
3. Growth: earnings have been rising against flat-looking revenue and cash flow. 3/5
4. Price to earnings: a forward 21 assumes earnings will cycle higher. 3/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score Hammerson 19 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return, going forward.
Dividend cover hits the target under REIT rules, borrowings seem under control and recent trading has been good. Taken with the positive outlook, I’m tempted to buy Hammerson shares at this point in the economic cycle.
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> Kevin does not own shares in Hammerson.