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 Old Mutual (LSE: OML), the insurance and financial services company.
With the shares at 191p, Old Mutual’s market cap. is £9,350 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 5,156 | 3,020 | 3,460 | 3,584 | 3,725 |
| Net cash from operations (£m) | 1,988 | 1,268 | 3,419 | 549 | 2,390 |
| Adjusted earnings per share | 14.9p | 11.6p | 11.2p | 18p | 17.7p |
| Dividend per share | 2.45p | 1.5p | 4p | 5p | 7p |
The recent interim report made for pleasant reading at Old Mutual. Compared to 2012’s first half, adjusted operating profit is up 14%, funds under management up 9%, earnings per share up 22% and the that all-important dividend up 20% – right now, the forward dividend yield is running at around 4.8%.
The firm earns its crust offering life and general insurance, asset management and banking and has come a long way since its 19th century establishment in South Africa. Operations have spread around the world and now extend to Europe, the US, the wider African continent, India, China and Latin America.
The biggest reporting segment is Emerging Markets, which delivered 72% of adjusted operating profit last year. That makes the sector’s stunning growth rate in these interims of 49% very interesting to potential investors, and encourages me to be optimistic about the firm’s total-return prospects from here.
Old Mutual’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 around2.5 times 4/5
2. Borrowings: gross debt is running at around the level of annual pre-tax profits.4/5
3. Growth: rising revenue has led to flat-looking earnings and patchy cash flow. 3/5
4. Price to earnings:a forward nine compares well to growth and yield expectations. 4/5
5. Outlook: good recent trading and an optimistic outlook. 4/5
Overall, I score Old Mutual 19 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return, going forward.
Foolish Summary
This is a solid set of results against my quality and value indicators, which encourages me to believe that, yes, I should invest in Old Mutual.
Indeed, Old Mutual’s well-covered dividend of nearly 5% and its seemingly modest valuation against earnings forecasts is tempting. However, I’m also considering an idea from the Motley Fool’s top value investor who has discovered what he believes is the best income generating share-play so far during 2013.
He sets out his three-point investing thesis in a report called “The Motley Fool’s Top Income Share”, which I recommend you download now. For a limited time, the report is free so, to download it immediately, and discover the identity of this dividend-generating star, click here.
> Kevin does not own shares in Old Mutual.
