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 Centrica (LSE: CNA), Standard Chartered (LSE: STAN), Fresnillo (LSE: FRES), Legal & General (LSE: LGEN) and Hammerson (LSE: HMSO). This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of 5):
| Share | Centrica | Standard Chartered |
Fresnillo | Legal & General |
Hammerson |
|---|---|---|---|---|---|
| Dividend cover | 3 | 4 | 3 | 3 | 5 |
| Borrowings | 4 | 1 | 5 | 3 | 3 |
| Growth | 5 | 4 | 1 | 4 | 3 |
| Price to earnings | 3 | 4 | 1 | 3 | 3 |
| Outlook | 4 | 5 | 1 | 5 | 5 |
| Total (out of 25) | 19 | 18 | 11 | 18 | 19 |
Gas & Electricity
Centrica is a well-balanced energy company deriving its operating profits from both upstream and downstream operations in roughly equal proportion. The recent steady-as-she goes interim results statement is encouraging, but downstream operations could suffer if we have another mild winter. But over the long haul, energy demand tends to average out and a steady looking financial record makes me optimistic about the company’s total-return prospects. I’m tempted to buy.
Banking
In the recent half-year results, Hong Kong, India and Africa stood out as the best-performing regions for Standard Chartered, although a good result came from all the regions in which the firm is active. The bank is something of a specialist in emerging markets and aims to get the basics right. I think it does, so I’m optimistic about the total-return outlook from here and might buy some shares.
Mining
At Fresnillo, a debt-free balance sheet attests to the allure of gold and silver when prices are rising. The firm derived around 49% of its revenue from gold, 47% from silver and 4% from zinc and lead last year and some investors saw a, roughly, 20-fold increase in Fresnillo’s share price between 2008 and 2011.
However, the recent interim statement revealed that the average realised silver price during the period was down 20.3%, and gold down 10.6%, leading to revenue down 14.7%, earnings per share down 61% and a dividend down 68%. Volatile commodity prices can cause havoc with mining companies’ profits, which is why potential investors should form a view on where prices might be heading. My view is neutral, and I’m too chicken to buy the shares as a result.
Life insurance
Recent double-digit growth in sales, cash, operating profits and profit after tax is encouraging at Legal & General. Last year, the firm earned around 66% of its operating profit from insurance and annuities, 22% from investment management and 12% from savings products.
The directors think that current moves by banks to reduce the gearing of their balance sheets is a source of opportunity, because reduced banking capacity means Legal & General can sell its investment and savings products to potentially unserviced banking customers. I’m optimistic about the total-return potential for investors and might buy the shares.
Commercial Property
Hammerson focuses on retail property, having recently sold its London-office portfolio. The shares trade at about a 10% discount to the company’s asset value per share but, as the economic cycle unfolds asset values and rents could rise, which could lead to a gently rising share price and an increasing dividend. A forward dividend yield of about 4% looks attractive and I’m optimistic about the firm’s total-return outlook from here, which is why I’m likely to buy the shares.
What now?
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> Kevin does not own any of the shares mentioned. The Motley Fool owns shares in Standard Chartered.