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 RSA Insurance Group (LSE: RSA), William Hill (LSE: WMH), Mondi (LSE: MNDI), Travis Perkins (LSE: TPK) and TUI Travel (LSE: TT). This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of 5):
| Share | RSA | William Hill |
Mondi | Travis Perkins |
TUI Travel |
|---|---|---|---|---|---|
| Dividend cover | 3 | 4 | 4 | 5 | 4 |
| Borrowings | 3 | 3 | 2 | 4 | 2 |
| Growth | 3 | 5 | 4 | 3 | 4 |
| Price to earnings | 4 | 3 | 4 | 3 | 3 |
| Outlook | 5 | 3 | 4 | 3 | 5 |
| Total (out of 25) | 18 | 18 | 18 | 18 | 18 |
Insurance
A recent 33% dividend cut tells the cash flow story at RSA Insurance. With flat cash flow struggling to support volatile earnings and growing revenue, the firm is reliant on its meaty investment income. To generate that some big-looking underlying sums of money are at work, and the risk here is that when big numbers shift a little, the little numbers they generate can move a lot. That makes me nervous about RSA’s total-return potential over the long haul so I’m not investing.
Betting
William Hill’s high repeat-purchase credentials bode well for investor total-returns. Although the firm’s US and corporate operations delivered a small loss during 2012, the directors reckon the recent acquisition of Sportingbet’s Australian and Spanish businesses lays the foundations for growth in the attractive Australian market. I think the firm could succeed abroad and, on that basis, the valuation seems modest. I’m likely to have a flutter here.
Paper and packaging
Mondi’s paper and packaging business has spread all over Europe from its South African origins. However, there’s a fair bit of debt on the balance sheet and the cyclicality inherent in the business puts me off investing right now. This is one to keep an eye on for market bottoms in my view.
Building Materials
Travis Perkins has enjoyed a good run with the shares increasing around eight times since their 2009 nadir. That’s ample evidence of the firm’s cyclicality and proof of the attractions of distributors as a share vehicle for riding the fortunes of an industry. Building-supplies demand is evidently bouncing back, but timing the bounce is crucial when investing in cyclical companies. I’m staying out of Travis shares for now.
Travel
The travel industry is another one with undeniable cyclicality. TUI Travel’s shares have travelled well, rising about 200% since 2011 as bookings have picked up in Europe. The firm services many aspects of the typical holiday experience and owns several popular holiday brands but, despite the recent good financial performance and rosy outlook, I’m nervous about total-return potential from here so intend to stay out of the shares.
What now?
William Hill is the pick of the bunch, for me, but I have seen stronger investment opportunities.
