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 during recent weeks I've looked at BHP Billiton (BHP), Severn Trent (SVT -1.30%), Whitbread (WTB -2.52%), Schroders (SDR -1.87%), and Aggreko (AGK). This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of 5):
| Share | Billiton | Severn | Whitbread | Schroders | Aggreko |
|---|---|---|---|---|---|
| Dividend cover | 4 | 2 | 4 | 4 | 5 |
| Borrowings | 4 | 1 | 4 | 4 | 3 |
| Growth | 3 | 3 | 4 | 3 | 4 |
| Price to earnings | 4 | 1 | 3 | 4 | 2 |
| Outlook | 2 | 3 | 5 | 3 | 3 |
| Total (out of 25) | 17 | 10 | 20 | 18 | 17 |
Whitbread is ahead on the scoring but each company has its attractions, and the selection offers potential for sector diversification.
Resources
Recent softening demand has led to easing commodity prices, leaving big miners like Billiton with substantial reductions in year-on-year profits. In recent news, the firm's incoming CEO has revealed his new management team. They'll have their hands full, as the company's recent outlook statement acknowledged a great deal of macroeconomic uncertainty, and that makes me cautious about Billiton's ability to outperform on total returns from here.
Water utility
Income seekers continue to flow to Severn Trent for that roughly 4.7% forward yield, but the dividend is only barely covered by earnings. A large debt-pile sees interest payments flush about 50% of annual operating profits down the drain, but there's no denying that the firm's water infrastructure assets are reliable revenue producers with locked-in consumers. To me, investors have pushed the valuation too high, though, so I'll continue to watch.
Hospitality
Costa owner Whitbread is seeing double-digit sales growth across most of its hotel and restaurant brands this year. The firm's well-known coffee brand contributes about 30% of total revenue, enough to make the fast-growing chain interesting to Whitbread investors. The current valuation seems fair, which bodes well for the total-return prospects from here. I think Whitbread looks worth buying on the dips for that steady growth.
Fund management
Last year, Schroders saw a net inflow of 9.4 billion pounds of clients' money, taking the total to 212 billion pounds. That's a decent investment by institutions and individuals from which Schroders can skim a management fee. Such fees provided 86% of revenue last year, with just 2% earned by performance fees, and 12% from other sources. Any improvement in performance fees could boost the firm's bottom line, as could further net inflows of funds. Either could see Schroder investors enjoying decent total returns from here. An undemanding valuation makes Schroders look tempting.
Power equipment rental
After a strong comparator in 2012, Aggreko's directors are expecting 2013 trading to be tougher.
Longer term, the firm points to a weakening growth trend in emerging markets as a reason to be cautious. That said, the new trading year has started well with an 8% rise in underlying revenue, but I'm holding back from buying after the recent warning calls on growth because I think the valuation looks a little high.
Action plan
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