Should I Invest In London Stock Exchange Group 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 London Stock Exchange Group (LSE: LSE), the equity, bond and derivatives markets operator.

With the shares at 1642p, London Stock Exchange’s market cap. is £4,463 million.

This table summarises the firm’s recent financial record:

Year to March 2009 2010 2011 2012 2013
Revenue (£m) 671 628 675 815 871
Net cash from operations (£m) 225 215 265 303 343
Adjusted earnings per share 74.2p 60.1p 73.7p 100.6p 105.3p
Dividend per share 24.4p 24.4p 26.8p 28.3p 29.5p

London Stock Exchange Group operates international equity, bond and derivatives markets, such as London Stock Exchange, Borsa Italiana, MTS and Turquoise. The firm describes its role in capital markets as matching investors with companies and other issuers seeking capital.

The recent crisis in global financial markets affected the firm’s trading but, since then, efforts to expand both the geographical reach and diversity of its service offering have been paying off, as you can see in the table.  

Last year, 44% of revenue came from the capital markets, 32% from information services, 15% from post-trade services and 9% from technology and other services.

Competition seems limited and London Stock Exchange has a great pedigree. Perhaps a high valuation, then, comes with the territory. Despite my reservations about valuation and recent strong share price performance, I think London Stock Exchange could deliver decent investor total returns from here over the long haul.

London Stock Exchange’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 the recent dividend around 3.5 times.  5/5

2. Borrowings: net debt is running around the level of operating profit.  4/5        

3. Growth: cash flow supports recently rising earnings and revenue.  5/5

4. Price to earnings: a forward 15 seems ahead of growth and yield expectations.  2/5

5. Outlook: good recent trading and a positive outlook.   5/5

Overall, I score London Stock Exchange 21 out of 25, which encourages me to believe the firm has potential to outpace the wider market’s total return, going forward.

Foolish summary

According to my business quality indicators, London Stock Exchange is firing on all cylinders. Perhaps that’s why the valuation looks generous.

The firm's strong economic positioning reminds me of five other companies that inspire enthusiasm, each with seemingly impregnable, moat-like financial characteristics.  A new Motley Fool report, prepared by our top analysts, highlights the attractions of those five shares: "5 Shares To Retire On".

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> Kevin does not own shares in London Stock Exchange Group.