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 Legal & General Group (LSE: LGEN), the life insurance and financial services company.
With the shares at 198p, Legal & General’s market cap. is £11,719 million.
This table summarises the firm’s recent financial record:
|Year to December||2008||2009||2010||2011||2012|
|Net cash from operations (£m)||1,086||758||2,707||1,557||2,799|
|Adjusted earnings per share||(17.88p)||14.82p||14.07p||12.42p||13.9p|
|Dividend per share||4.06p||3.84p||4.75p||6.4p||7.65p|
Legal & General’s share price has been shooting upwards since 2009 and the recent interim-results statement confirmed why that is: with double-digit growth in sales, cash, operating profits and profit after tax, things couldn’t be going better.
Last year, the firm earned around 66% of its operating profit from insurance and annuities, 22% from investment management and 12% from savings products, and generated revenue worldwide from mature businesses in Britain, the US, France, and the Netherlands, and from up-and-coming fast-growing businesses in places like the Persian Gulf, India, Egypt and Asia.
The directors see current moves by banks to reduce the gearing of their balance sheets as one source of opportunity. Reduced banking capacity means that Legal & General can move into the market to soak up ‘lonely’ potential banking customers with its investment and savings offerings.
The firm is obviously doing a lot of things right just now, and that makes me optimistic about the total-return potential for investors.
Legal & General’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 just over 1.8 times. 3/5
2. Borrowings: gearing with regard to core borrowings is running at around 60%. 3/5
3. Growth: strong cash flow supports rising earnings and flat-looking revenue. 4/5
4. Price to earnings: a forward 12 reflects growth and yield expectations. 3/5
5. Outlook: robust recent trading and a positive outlook. 5/5
Overall, I score Legal & General 18 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return, going forward.
A good track record of financial growth underpins a satisfactory scoring against my quality and value indicators. Both recent trading and the outlook are good. There’s a 5% forward dividend yield on offer and, if I had a few spare quid, I’d probably chuck them at Legal and General on any temporary share-price weakness.
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> Kevin does not own shares in Legal & General Group.