Should I Invest in British Sky Broadcasting 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 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 British Sky Broadcasting Group  (LSE: BSY  ) , the satellite broadcasting company.

With the shares at 779 pence, BSkyB's market cap is 12,441 million pounds.

This table summarizes the firm's recent financial record:

Metric

2008

2009

2010

2011

2012

Revenue (millions of pounds)

4,952

5,359

5,709

6,597

6,791

Net cash from operations (millions of pounds)

877

1,074

1,364

1,357

1,500

Adjusted earnings per share

25.1 pence

25.9 pence

32.1 pence

41.6 pence

50.8 pence

Dividend per share

16.75 pence

17.6 pence

19.4 pence

23.28 pence

25.4 pence

Year to June.

With revenue up 6% and adjusted operating profit up 9%, the recent three-quarter results reveal that BSkyB's multi-product approach is paying off. Positive outcomes include rapid growth in subscriptions to Internet-connected HD satellite TV boxes, up 35% to 2.3 million in the last quarter alone, and a 500% increase in year on year on-demand downloads to an average of 4.5 million a week.

The subscription model leads to reliable and repeatable cash flows as customers tend to stick with the service. Churn rates are as low as an annualized 10.8%, and around 34% of consumers take a full offering of TV, broadband and telephony services, up from 31% a year ago.

Such steady growth is encouraging and makes me optimistic about the company's ability to deliver decent investor total returns from here.

BSkyB'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 twice. 4/5

2. Borrowings: net debt is around 1.5 times the level of operating profit. 4/5

3. Growth: revenue, earnings and cash flow have all grown steadily over the period. 5/5

4. Price to earnings: a forward 13 looks ahead of growth and yield expectations. 2/5

5. Outlook: good recent trading and an optimistic outlook. 4/5

Overall, I score BSkyB 19 out of 25, which encourages me to believe the firm has some potential to out-pace the wider market's total return, in the long run.

Foolish Summary
With under-control borrowings, decent dividend cover, a record of steady growth and an optimistic outlook, there are many positives. However, the valuation does look a little full so I'm keeping the shares on watch for the time being.

But a growth story uncovered by one of the Fool's top investment writers tempts me. He has put his money where his mouth is by investing and believes the share to be the "Motley Fool's Top Growth Share for 2013". You can discover how the company has reenvisioned itself to allow for tremendous growth along new horizons. Right now, the report is free 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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