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 Prudential (LSE: PRU) (NYSE: PUK.US), one of the UK’s largest life insurers, with operations in the UK, US and Asia.
With the shares at 1125p, Prudential’s market cap. is £28,818 million.
This table summarises the firm’s recent financial record:
|Year to December||2008||2009||2010||2011||2012|
|Net cash from operations (£m)||1,144||108||1,948||1,738||446|
|Adjusted earnings per share||39.9p||47.5p||62p||62.8p||76.8p|
|Dividend per share||18.9p||19.85p||23.85p||25.19p||29.19p|
The recent first-quarter update shows that Prudential has made a good start to the year with an 18% rise in Asian sales compared to the equivalent quarter in 2012, a 6% uplift in the US, and flat trading in the UK. Last year, around 84% of sales came from the firm’s core insurance operations business, with the remaining 16% earned on various forms of asset management activities.
The directors reckon that Prudential’s Asian activities offer the greatest growth potential, where people have yet to mass adopt insurance products as they have in western markets, despite the existence of a rapidly growing, increasingly urbanised, and affluent middle class. Last year, around 32% of pre-tax profit came from Asia, enough to make the recent growth rate exciting for Prudential investors. Meanwhile, the mature cash-cow markets of the UK and the US delivered 36% and 32% of pre-tax profit respectively.
Prudential’s progress in the up-and-coming regions of the world is encouraging, and I’m optimistic about the firm’s total-return prospects from here.
Prudential’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 around 2.6 times. 4/5
2. Borrowings: net borrowings are running around the level of operating profit. 4/5
3. Growth: falling cash flow, and rising revenue and earnings.2/5
4. Price to earnings: a forward 12 compares well to earnings and yield expectations. 4/5
5. Outlook: satisfactory recent trading and an optimistic outlook. 4/5
Overall, I score Prudential 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.
This is a healthy scoring against my quality and value indicators, which encourages me to believe that, yes, I should invest in Prudential.
But I’m also excited about the five shares with potential for steady total returns examined in a new Motley Fool report called “5 Shares To Retire On”, which highlights companies with seemingly impregnable, moat-like financial characteristics, which our top analysts urge you to consider for your long-term retirement portfolio. They are shares that deserve consideration for any investor aiming to build wealth in the long run. For a limited period, the report is free. To download your copy now, click here.
> Kevin does not own shares in Prudential.