Should I Invest in These 5 FTSE 100 Shares?

LONDON -- 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 during recent weeks I've looked at BP  (LSE: BP  ) , John Wood Group  (LSE: WG  ) , BT Group (LSE: BT.A),Rexam  (LSE: REX  ) and IMI  (LSE: IMI  ) . This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of 5):

Share

BP

Wood

BT

Rexam

IMI

Dividend cover

5

5

4

4

4

Borrowings

4

4

2

2

4

Growth

5

2

3

4

2

Price to earnings

4

5

3

3

3

Outlook

4

5

3

4

4

Total (out of 25)

22

21

15

17

17

So there's a clear winner on the scoring with BP, but each share has its attractions:

Big oil
Despite the on-going drag on cash flow from BP's Gulf of Mexico disaster, and unquantified U.S. government fines still to be paid, the business is trading well, as the scoring shows. Because of the uncertainty in the U.S., the shares appear to offer reasonable value. I think the firm has better growth opportunities than the valuation suggests. Recent strategy refocusing has led to a string of asset sales, as the firm seeks to target high-impact exploration opportunities and to leverage its expertise. On that front, the recent deal in Russia seems encouraging, where BP has collaborated with, and now owns 19.75% of, state-controlled oil and gas enterprise Rosneft. As the Macondo fall-out recedes, more free cash will be available for the company to invest and to return to shareholders. That encourages me to believe that BP's total return could out-pace the wider market going forward. To me, the shares are attractive.

Engineering services
Wood's services are in demand in some of the busiest energy-producing areas around the world, such as in renewable energy and the shale regions. Although cash flow has been trending down, adjusted earnings cover the dividend well, and the outlook is promising. With the seemingly undemanding valuation that the shares place on the company I think that Wood Group's shares look interesting.

Meanwhile, the recent half-year results showed steady progress at IMI, which operates in around 75 countries, employing about 14,700 people to produce valves and flow-control equipment for liquids in industries like energy, transport, beverage dispensing, heating, ventilating and air conditioning. Borrowing seems under control and earnings cover the dividend well. Trading has been good recently but I'm interested to see the full-year results, due in March, to see if cash flow is keeping up. The outlook is encouraging, but growth expectations seem priced into the shares, so I'm keeping the firm on watch, for now.

Telecommunications
BT provides communications services in more than 170 countries. Right now, the company is promoting fiber-optic cable as a means to better broadband. Around 10 million British homes and businesses are now close enough to a cable to get a connection with about half a million having actually taken up the fiber-optic option; but BT is still the U.K.'s biggest broadband provider and fiber-optic services is one area of the firm's business with growth potential. There is good support for earnings from cash flow but, along with revenue, cash flow appears to be declining from its historically high levels. There's a well-covered dividend, recently increased by 15%, and I'm happy to put the shares on my watch list for the time being.

Consumer goods packaging
About 90% of Rexam's business is making beverage cans, but it's an area with quite a bit of cyclicality. The firm hit a difficult patch that led to a dilutive fund- raising event in 2009, designed to help it pay down some of its troublesome debt. Since then, Rexam's cash flow has been strong, which should help the company manage ongoing interest payments on what is still quite a large debt pile of around £1.35 billion, just about half the level that caused the firm difficulties. Earnings growth has been steady, there is decent dividend cover, and the outlook is encouraging. However, I like to buy into companies when the shares offer a bargain and, right now, I think the shares price Rexam fairly, so I won't be investing for the time being.

Action plan
I've taken the plunge with BP and I'm seriously thinking about investing in Wood Group, too. If we want to achieve superior investment returns as investors, it makes sense that we should seek out superior investment opportunities. Keeping a keen focus on a company's ability to deliver a superior total return is one way of doing that. Indeed, step four in the Motley Fool's report "10 Steps to Making a Million in the Market" asserts that "shares beat funds" and I think that is good advice, particularly if you are targeting superior total returns. In fact, I recommend the report for any ambitious investor. Click here to download it while it is still free and you can find out the other nine steps recommended that could transform your wealth.

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