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 Antofagasta (LSE: ANTO), the copper-focused mining company operating in Chile.
With the shares at 853p, Antofagasta’s market cap. is £8,409 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue ($m) | 3,373 | 2,963 | 4,577 | 6,076 | 6740 |
| Net cash from operations ($m) | 1,882 | 1,006 | 1,964 | 2,466 | 2,818 |
| Earnings per share (cents) | 85.5 | 67.7 | 100.6 | 139.7 | 140.2 |
| Dividend per share (cents) | 9 | 9.4 | 16 | 20 | 21 |
The recent first-quarter update demonstrated that Antofagasta is performing well operationally, with an impressive 12.8% rise in copper production compared to the equivalent period last year. But, against a backdrop of lower copper prices, that’s like peddling your bike furiously into the teeth of an oncoming hurricane. The figures reveal the result: revenue down 14.6% and EBITDA down a grim-looking 29% — despite all the effort, the financials are heading in the wrong direction!
Of course, all that can change on a sixpence, but it does drive home how volatile commodity prices largely drive investor results when it comes to mining. Whatever you do before investing in the sector, take a view on where commodity prices might be heading before succumbing to the allure of sexy looking valuation metrics and fat-face dividend yields.
Copper is the shiny stuff important to Antofagasta, delivering 82% of revenue last year. There was also 7% from gold, 5% from molybdenum and 1% from silver, with the remaining 5% from other activities. I’m ambivalent about the firm’s total-return prospects from here, and that’s enough to keep me out of the shares.
Antofagasta’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 almost seven times. 5/5
2. Borrowings: at the last count, there was net cash on the balance sheet. 5/5
3. Growth: revenue and earnings show steady growth with good support from cash flow. 5/5
4. Price to earnings: a forward 13 looks rich compared to growth and yield expectations. 1/5
5. Outlook: recent profits are down, but the firm remains optimistic about its opportunities. 3/5
Overall, I score Antofagasta 19 out of 25, but remain neutral about the firm’s potential to out-pace the wider market’s total return, going forward.
Foolish Summary
There’s no doubt that the company has performed well in the past, as evidenced by the growth and cash-related indicators. Looking forward, most commentators expect earnings to decline, and I fear that the share price might have further to fall. Therefore, I’m keeping Antofagasta on my watch list for now.
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> Kevin does not own shares in Antofagasta.
