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 Standard Life (LSE: SL), Sports Direct International (LSE: SPD), Randgold Resources (LSE: RRS), easyJet (LSE: EZJ) and London Stock Exchange (LSE: LSE). This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of 5):
| Share | Standard Life | Sports Direct | Randgold | easyJet | LSE |
|---|---|---|---|---|---|
| Dividend cover | 4 | 5 | 5 | 4 | 5 |
| Borrowings | 3 | 4 | 5 | 5 | 4 |
| Growth | 2 | 3 | 3 | 3 | 5 |
| Price to earnings | 3 | 3 | 3 | 3 | 2 |
| Outlook | 5 | 5 | 3 | 4 | 5 |
| Total (out of 25) | 17 | 20 | 19 | 19 | 21 |
Financial services and investment
Earnings from Standard Life’s operating business, which delivered fee, commission and other revenues of £983m last year, are small compared to the firm’s investment operations, which generated a return of £13,982 million from £232 billion of assets. So, to invest in a firm like Standard Life, I think you have to take a view on where financial, equity and property markets might be heading as the total-return outcome for Standard Life investors largely depends on such movements. My view is neutral, so I’m not keen to invest in the firm’s shares.
Retailing
Sportswear’s migration to mainstream fashion seems to have provided a wave for Sports Direct to ride as the firm developed over 30 years or so to its current, roughly, 500-store size. Last year, 85% of the firm’s operating profit came from its UK retailing operation but investors now will have an eye towards international expansion. Although Sports Direct’s growth seems intact, I’m cautious on the shares and worried about potential P/E compression, therefore, I’ll continue to watch.
Gold mining
Although showing recent operational progress with production and sales slightly up, Randgold Resources realised a 9% lower average price per ounce for its gold sales this year compared to last year, which contributed to profit down 45% and net cash from operations down 60%. The gold price is important to the firm, although reserves do not need writing down as long as prices stay above US $1000/oz. It’s essential to take a view on the gold price to invest in Randgold. I don’t have one so will stay out.
Airline
The airline business is cyclical but easyJet has been trading well in Europe lately. The CEO puts market share-gaining success in the short-haul market down to the strength of the firm’s business model. Indeed, low-cost, no frills travel has caught on in Europe and, in these austere times, as long as easyJet continues to execute well, I think demand for the firm’s offering is likely to grow as economic recovery continues. But the valuation seems full and, as with any cyclical business, I’m mindful that P/E multiples can compress as the economic cycle plays out. I’m cautious about easyJet’s total-return potential from here, even though the firm is growing.
Financial markets
Operator of international equity, bond and derivatives markets London Stock Exchange Group describes its role in capital markets as matching investors with companies and other issuers seeking capital. The firm is trying to expand both the geographical reach and diversity of its service offering with some success. Last year, 44% of revenue came from the capital markets, 32% from information services, 15% from post-trade services and 9% from technology and other services. Competition seems limited and London Stock Exchange has a great pedigree. Such credentials attract a high valuation, but I think London Stock Exchange could deliver decent investor total returns from here over the long haul.
