Should I Invest in SABMiller?

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 SABMiller  (LSE: SAB  ) , which is one of the world's largest brewing companies.

With the shares at 3,656 pence, SABMiller's market cap is 58,573 million pounds.

This table summarizes the company's recent financial record:

Metric

2008

2009

2010

2011

2012

Revenue (millions)

$21,410

$18,703

$18,020

$19,408

$21,760

Net cash from operations (millions)

$2,805

$2,183

$3,277

$3,043

$3,937

Adjusted earnings per share (cents)

$0.1431

$0.1375

$0.1611

$0.1915

$0.2148

Dividend per share (cents)

$0.58

$0.58

$0.68

$0.81

$0.91

Year to March.

People drink beer no matter what! That's one of the reasons SABMiller seems to grind inexorably forward, increasing sales, raising its dividend, and expanding steadily across the globe. In fact, its recent share-price performance has been something of a total-return-seeking investor's dream.Year to March.

There's more to the firm's success than the world population's beer-drinking habits though. The company has been trying hard to maintain quality, control costs, and to execute its expansion strategy. Right now, the directors see strong potential for growth in emerging markets, and input cost pressures that seem set to continue -- a mixed bag of challenges for the recently appointed CEO, Alan Clark.

Last year, around 23% of revenue came from Latin America, 20% from South Africa, 17% from Europe, 17% from North America, 12% from Africa, and 11% from the Asia Pacific. Looking at that mix, I reckon SABMiller is a decent emerging market play, although the valuation seems a little ahead of city growth forecasts for the time being. In the longer run, I still think SAB is capable of pleasing investors on total returns, even from here.

Full-year results are due later this month; I'll be watching with interest.

SABMiller'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 about 2.4 times. 4/5

2. Borrowings: net debt is running at around 3.5 times the level of operating profit. 2/5

3. Growth: revenue and earnings have been growing with satisfactory cash flow support. 4/5

4. Price to earnings: a forward 18.5 looks ahead of growth and yield expectations. 2/5

5. Outlook: satisfactory recent trading and a cautiously positive outlook. 4/5

Overall, I score SABMiller 16 out of 25, which encourages me to believe the firm still has some potential to out-pace the wider market's total return, going forward.

Foolish summary
Although borrowings seem quite high, SAB has dependable cash flow fueled by a product that customers tend to repeatedly purchase. Dividend cover is strong and the company has recently enjoyed balanced growth. The outlook is encouraging despite the robust valuation. I'm keeping SAB on watch for now but may buy on any share-price weakness

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