Should I Invest in Serco Group?

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 year since Jan. 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 Serco Group  (LSE: SRP  ) , which is a service company serving the public and private sectors. With the shares at 623 pence, Serco's market cap. is 3,111 million pounds.

This table summarizes the firm's recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue (million pounds) 3,124 3,970 4,327 4,646 4,913
Net cash from operations (million pounds) 163 235 241 217 303
Adjusted earnings per share 22.2 pence 29.53 pence 34.69 pence 39.69 pence 42.55 pence
Dividend per share pence 6.25 pence 7.35 pence 8.4 pence 10.1 pence

Serco is a service and outsourcing company with around 120,000 employees providing services to government and private clients in more than 30 countries. 2012 was a good year, generating some 5.8 billion pounds in contract wins and the order book now stands at around 19.1billion pounds.

The firm's operations are diverse and this year's wins include things such as ferry services to the Northern Isles in Scotland, U.K., asylum applicant accommodation and transport services, and U.S. Army base closure support in Afghanistan

Last year, around 56% of revenue came from the U.K., 14% from the U.S., 17% from Europe, and 13% from other countries. If Serco can keep executing the contracts it wins profitably, there's every reason to be optimistic about the total-return potential available to investors.

Serco'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 four times. 5/5

2. Borrowings: net gearing around 52% with net debt about 1.9 times earnings. 3/5

3. Growth: revenue, earnings, and cash flow have all been trending up. 5/5

4. Price to earnings: a forward 13 takes full account of growth and yield expectations. 3/5

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

Overall, I score Serco 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
Robust dividend cover, under-control debt, a convincing growth pedigree, and an encouraging outlook all combine to make Serco look attractive at the current fair valuation. That leads me to believe that Serco has potential to make a decent investment if bought on share-price dips.

It can be difficult to judge entry points, but one of the Fool's top investment writers has uncovered a share that looks like a very attractive situation. He has put his money where his mouth is by investing and believes the share is the "Motley Fool's Top Growth Share for 2013." In this new Fool report, you can discover how the firm has reenvisioned itself to allow for tremendous growth along new horizons. Right now, the report is free to download and tells you exactly why our expert has invested in, and expects strong growth from, this changing company with a strong pedigree. To get your copy, click here.


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