Should You Buy Capita Today?

LONDON -- Shares in British outsourcing behemoth Capita  (LSE: CPI  ) have been extremely volatile over the past five years. More recently, the stock has gradually edged higher during the course of the last 12 months, before collapsing 6.7% from early April's all-time peak of 913.5 pence to current levels.

I believe the shares should resume their march higher in the near term, however, as solid earnings potential and an increasingly lucrative dividend policy once again whet investors' appetites.

Juicy growth noted in 2012
Capita announced in February an organic growth rate of 3% for 2012, which snapped back from the 7% decline seen in the previous year and helped to drive pre-tax profits 10% higher to 472 million pounds.

The company also noted that contract wins doubled to 4 billion pounds during 2012. Meanwhile, the sales pipeline leapt to 5.2 billion pounds as of the time of the release vs. 4.8 billion pounds in November. The current pipeline now spans 27 separate bids with an average life of nine years, figures that provide excellent long-term revenue visibility for investors.

Although Capita warned of lower margins moving forward -- underlying operating margins dropped to 14.07% last year from 14.59% in 2011, and further margin pressure was cited for 2013 -- I believe the company should continue to win new business to offset the squeeze and keep earnings growing.

An attractive all-round stock selection
City analysts expect earnings per share to rise 6% in 2013, to 57 pence, before advancing a further 9% the following year to 62 pence.

In addition, the company has a solid track record of chunky dividend rises in recent times -- full-year dividends over the past five years have printed a compound annual growth rate of 14% -- and this record is expected to carry on into the medium term.

Last year's payout of 23.5 pence per share, itself 10% higher from 2011 levels, is set to advance to 25.6 pence per share this year before accelerating to 27.9 pence per share in 2014, according to broker estimates.

These payments carry yields below the current FTSE 100 income of 3.3%, at 2.9% and 3.2% for this year and next, but I expect steady earnings growth to push shareholder returns above this level in coming years.

Furthermore, prospective dividends for the next two years come well protected with coverage of 2.2 times forward earnings for 2013 and 2014, above the security touchstone of 2 times.

Capita currently trades on a P/E rating of 15.1 for this year, which is forecast to drop to 13.8 in 2014. Both projections are far below the forward earnings multiple of 21 for the entire support services sector. In my opinion, the P/E forecasts represent stunning value for investors given the company's excellent growth prospects and commitment to swelling shareholder returns.

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