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 Land Securities Group (LSE: LAND), the UK-focused commercial property company.
With the shares at 967p, Land Securities’ market cap. is £7,570 million.
This table summarises the firm’s recent financial record:
|Year to March||2009||2010||2011||2012||2013|
|Net cash from operations (£m)||367||179||154||254||247|
|Adjusted earnings per share||62.6p||34.1p||35.5p||38.5p||37p|
|Dividend per share||51.1p||28p||28.2p||29p||29.8p|
For this series of articles, I’m awarding notional first prize to Land Securities for focusing on total shareholder returns; the chairman mentioned the firm’s recent 19.1% performance in the full-year results statement. That’s a decent shareholder return from a company that operates as a commercial property Real-Estate Investment Trust (REIT), with a portfolio of offices, shops, shopping centres, hotels, leisure assets and retail warehouse properties. Around 53% of such office and retail properties are in London.
By investing in property and improving it, the company aims to generate value by attracting customers on higher rents, which also helps to lift the valuation of the assets. Asset sales generally finance new acquisitions, as the firm divests poor performers or crystallises valuation gains. So the firm’s profits are dependent on net rental income and revaluation gains or losses.
That all makes it a little tricky for investors to value property holding companies by traditional means, as earnings can be volatile and cyclical. Right now, the P/E looks high at first glance, but improvements in rental income and upward revaluations could bring that figure down as we move forwards. Meanwhile, the shares are currently trading above the adjusted, diluted net asset value per share figure of 903p, suggesting that the market expects those asset values to rise.
Land Securities has continued investing through recent cyclical lows and that strategy is contributing to earnings now. The directors reckon the future prosperity of the firm is not so reliant on booming property prices, as on the successful execution of the company’s property trading strategy. However, to invest successfully in the sector, I think it’s essential for investors to form a view on the macro-economic cycle and where property prices might be heading.
Land Securities’ total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: net cash inflow covered the recent dividend around 1.38 times. 5/5
2. Borrowings: adjusted gearing is around 61% with interest cover about 2.4 times. 4/5
3. Growth: cash flow supports growing revenue and flat earnings. 4/5
4. Price to earnings: a forward PE of 24 or so suggests earnings are far from the peak of cycle. 3/5
5. Outlook: satisfactory recent trading and a cautiously optimistic outlook. 4/5
Overall, I score Land Securities 20 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return, going forward.
Cash flow dividend cover just above one is perfect under REIT rules, borrowings are under control and well supported by asset values. Cash flow underpins rental earnings and provides decent interest cover. The outlook is encouraging. However, the forward dividend yield of around 3.3% is insufficient to tempt me, so I’m watching the shares for the time being.
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> Kevin does not own shares in Land Securities Group.