Should I Invest In Reed Elsevier Plc?

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 Reed Elsevier (LSE: REL) (NYSE: RUK.US), which publishes and supplies specialist information solutions to various industries.

With the shares at 799p, Reed Elsevier’s market cap. is £9,475 million on the London stock exchange, representing around 53% of the overall value of the group. A dual-listing structure sees the remaining value attributed to shareholders holding the shares on the Amsterdam stock exchange.

This table summarises the firm’s recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue (£m) 5,334 6,071 6,055 6,002 6,112
Net cash from operations (£m) 1,058 1,191 1,353 1,282 1,407
Reported earnings per share 22.1p 17.2p 27.3p 32.4p 46p
Dividend per share 20.3p 20.4p 20.4p 21.55p 23p

In today’s world, long-term survival depends on constant evolution, and Reed Elsevier has been developing its customer offering since its origins in the 19th century. Now, there is a focus on becoming what the firm calls a ‘professional information solutions provider’ and a recent update  revealed that progress towards that goal is continuing by means of organic development, and through small acquisitions of content and data outfits, and disposals in  non core business areas.

Although there is progress in such restructuring activities, the financial performance and the immediate earnings outlook both seem a little muted, although the directors did say that they expect 2013 to be another year of underlying revenue, profit, and earnings growth. Since North America provided 51% of revenue last year, such growth seems likely. Europe delivered 23%, the UK, 16%, with the remainder of the company’s business coming from the rest of the world.

To get a flavour for the firm’s markets, it’s helpful to see that 34% of turnover came from scientific, technical and medical publications last year, 26% from the legal sector, 15% from risk solutions, 14% from exhibition related areas, and 11% from business information provision.

We’ll find out more about how things are going with the interim results, due towards the end of July.

Reed Elsevier’s total-return potential

Let’s examine five indicators to help judge the quality of the company’s total-return potential:

1. Dividend cover: reported earnings covered last year’s dividend twice.  4/5

2. Borrowings: net debt is running at around 2.4 times the level of operating profit.  3/5

3. Growth: cash flow supports growing earnings and rather flat-looking revenue. 4/5

4. Price to earnings: a forward 14 seems to be ahead of growth and yield expectations.  2/5

5. Outlook: satisfactory recent trading and a flat-sounding outlook.  3/5

Overall, I score Reed Elsevier 16 out of 25, causing me to believe that the firm may struggle to out-pace the wider market’s total return, going forward.

Foolish Summary

There’s a good track record of growth, decent dividend cover and a fair slug of debt. The valuation looks full, seeming to overstate the growth expectations. Although the forward dividend yield is running at about 3.2%, that’s not enough to tempt me, so I’m keeping Reed Elsevier on my watch list for now.

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> Kevin does not own shares in Reed Elsevier.