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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 today I'm looking at Kingfisher (LSE: KGF ) , which is Europe's largest home improvement retailer, known for its B&Q and Screwfix brands in the U.K.
With the shares at 276 pence, Kingfisher's market cap. is 6,530 million pounds.
This table summarizes the firm's recent financial record:
|Year to January||2008||2009||2010||2011||2012|
|Revenue (million pounds)||9,050||10,026||10,503||10,450||10,831|
|Net cash from operations (million pounds)||444||790||1,127||630||679|
|Adjusted earnings per share (pence)||10.6||11||16.4||20.5||25.1|
|Dividend per share (pence)||7.25||5.33||5.5||7.07||8.84|
Kingfisher operates more than 1,000 stores throughout eight countries in Europe and Asia, and employs around 80,000 people. Around 42% of revenue comes from France, 40% from the U.K. and Ireland and 18% from the rest of the world, which includes a hitherto loss-making, though recently cash-neutral, 40-odd-store presence in China.
Speaking of recent trading at the time of the current financial year's half-time results, the CEO said that unprecedented wet weather throughout the key spring and summer seasons in Northern Europe had affected footfall and demand for outdoor maintenance, gardening, and leisure products, which normally account for a significant proportion of the company's first-half sales. However, one happy outcome was that fast-growing grass caused a greater-than-normal turnover in lawn mowers!
Despite recent setbacks, the firm has big ambition and wants to fulfil its potential as the industry leader in home improvement. But aiming to become a world-class retailer is a course that brings its challenges. For example, the firm's nine-store Irish operation has recently been placed in examinership (similar to the process of administration in the U.K.) after a period of persistent losses, and attempts to penetrate the market in China have been unprofitable so far. The firm has scaled back its number of stores there by about 50% while it figures out ways to capture demand from non-DIY-savvy Chinese consumers. However, losses there have been reducing fast, which is encouraging.
The potential for expansion in Asia is obvious if purely considering population numbers. If Kingfisher can turn that potential into profit, alongside a protracted macroeconomic recovery in Europe, the prospects for investor total return could be bright.
Kingfisher's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:
1. Dividend cover: Last year's dividend was covered just under three times by earnings. 4/5
2. Borrowings: At the last count, there was net cash on the balance sheet. 5/5
3. Growth: Earnings have grown against a flatter performance from revenue and cash flow. 3/5
4. Price to earnings: A forward 10, which compares well to growth and yield forecasts. 4/5
5. Outlook: Satisfactory recent trading and a cautiously optimistic outlook. 4/5
Overall, I score Kingfisher 20 out of 25, which encourages me to believe the firm has potential to outpace the wider market's total return, going forward.
With no borrowings, a well-covered dividend, a reasonable valuation and a cautiously positive outlook, I'm encouraged to believe that Kingfisher could well make a decent investment at the current level. You may well agree, but if you don't, I suggest you download the "Motley Fools Top Growth Share for 2013," which is a new report about a company that has reenvisioned itself to allow for tremendous growth along new horizons. One of the Fool's top investment writers has put his money where his mouth is, and in this report he tells you exactly why he has invested in, and expects strong growth from, this changing company with a strong pedigree. To get your copy while it is still free, click here.