Should I Invest in These 5 FTSE 100 Shares?

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.

This series aims to identify appealing FTSE 100 investment opportunities and, during recent weeks, I've looked at National Grid  (LSE: NG  ) , Anglo American  (LSE: AAL  ) , HSBC Holdings  (LSE: HSBA  ) , Imperial Tobacco Group  (LSE: IMT  ) , and British Sky Broadcasting Group  (LSE: SKY  ) . This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of five):

Share

National

Anglo

HSBC

Imperial

BSkyB

Dividend cover

3

4

3

3

4

Borrowings

3

4

2

1

4

Growth

4

2

2

3

5

Price to earnings

2

4

4

4

2

Outlook

5

3

5

3

4

Total (out of 25)

17

17

16

14

19

Energy supply
U.K.-gas-and-electricity-transmission-systems custodian National Grid needs to balance capital expenditure, regulatory compliance, and loan-interest payments to turn a profit. The industry is highly regulated, but cash flows are solid, and should continue to filter down into steadily rising dividends, which are an important component of total returns. I'm looking to buy on the share-price dips.

Resources
Thanks to weaker commodity prices, last year was difficult for Anglo American. The firm is well diversified, focusing on platinum group metals, diamonds, copper, nickel, iron ore, metallurgical and thermal coal; but any investor thinking of buying the shares must take a view on where commodity prices might be going. My view is neutral, and that makes Anglo insufficiently tempting for me to buy right now.

Banking
HSBC achieved an almost 22% increase in its core tier 1 capital ratio to 12.3% during 2012. That's good progress since the 7% it achieved in 2008. By selling off badly performing areas of its business, reorganizing its operations, cutting costs, and focusing its investment capital, the bank has positioned itself for growth in the emerging markets that it targets. The outlook is positive, and I'm tempted to buy for the dividend, which is running at a forward yield of about 5%.

Tobacco
A recent 22.7% drop in earnings per share, a 9.7% decline in operating profit, and a 4.2% revenue contraction make me nervous about Imperial Tobacco. Industry volumes are in long-term decline, and recent results may presage more-difficult times ahead for a company that investors have become used to seeing as a steady growth proposition. The firm's share-repurchase program helps earnings per share to advance, but I'm not tempted to buy the shares despite the projected 5.4% dividend yield.

Satellite broadcasting
Thanks to factors such as 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, BSkyB's earnings have been advancing. The subscription model generates reliable cash flow from generally loyal customers. Such steady growth is encouraging, and makes me optimistic about the company's ability to deliver decent investor total returns from here. I'm watching, and may buy if the valuation eases further.

What now?
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