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 TUI Travel (LSE: TT), the travel firm and tour operator.
With the shares at 363p, TUI Travel’s market cap. is £4,056 million.
This table summarises the firm’s recent financial record:
| Year to September | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 13,932 | 13,851 | 13,514 | 14,687 | 14,460 |
| Net cash from operations (£m) | 378 | 218 | 520 | 613 | 502 |
| Adjusted earnings per share | 20.4p | 20p | 19p | 23.6p | 25.8p |
| Dividend per share | 9.7p | 10.7p | 11p | 11.3p | 11.7p |
With a hand in most aspects of the typical holiday experience, TUI Travel owns many popular holiday brands and derives the great majority of its business from Europe. But holiday booking tends to wax and wane with the economic cycles, and a glance at TUI’s share-price chart shows the volatility that results.
In 2011, the shares were around a third of the 363p or so they command today. They’ve had a good run and, despite the firm’s recent good financial performance and rosy outlook, that makes me nervous about total-return potential from here.
TUI Travel’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 earnings around 2.2 times. 4/5
2. Borrowings: net debt is running at around 3.5 times the level of operating profit. 2/5
3. Growth: robust cash flow supports growing earnings derived from flat-looking revenue. 4/5
4. Price to earnings: a forward 11 seems to recognise growth and yield expectations. 3/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score TUI Travel 18 out of 25, which encourages me to believe the firm has some potential to out-pace the wider market’s total return, going forward.
Foolish Summary
Decent dividend cover, high-looking debt and a recent record of growth all look fairly priced by the P/E rating. There is no obvious bargain here, despite the rosy outlook.
