Should I Invest in Capita?

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 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 Capita  (LSE: CPI  ) , an outsourcing specialist working for public and private sector organizations.

With the shares at 957 pence, Capita's market cap. is 6,291 million pounds.

This table summarizes the firm's recent financial record:

Year to December

2008

2009

2010

2011

2012

Revenue (million pounds)

2,441

2,687

2,744

2,930

3,352

Net cash from operations (million pounds)

295

307

340

232

412

Adjusted earnings per share (pence)

33.26

38.75

44.98

48.49

53.16

Dividend per share (pence)

14.4

16.8

20

21.4

23.5

At around 5.2 billion pounds, Capita's bid pipeline seems to keep on delivering. Recent wins added 660 million pounds of new contracts with organizations such as the Cabinet Office, Carphone Warehouse, and the University of Strathclyde. Such demand keeps the firm growing its business organically and through acquisitions, spending around 165 million pounds in 2013, so far, acquiring seven companies in areas such as justice and emergency services, customer management, and education and workplace services.

Clients typically outsource "non-core" functions to Capita, like administration, ICT, HR and payroll, strategic development, and business process engineering. It's a popular strategy that can improve efficiency -- outsourcing companies like Capita tend to execute well, as they are focused on the task and not distracted by the exigencies of the client's main business.

I'm optimistic that Capita's steady growth can translate into decent total returns for investors from here, as long as the valuation doesn't get too far ahead.

Capita'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 around 2.3 times. 4/5
  2. Borrowings: net debt is just under four times the level of operating profit. 2/5
  3. Growth: growing cash flow supports steadily rising revenue and earnings. 5/5
  4. Price to earnings: a forward 15 or so looks ahead of growth and yield expectations. 2/5
  5. Outlook: good recent trading and a positive outlook. 5/5

Overall, I score Capita 18 out of 25, which encourages me to believe the firm has some potential to outpace the wider market's total return, going forward.

Foolish summary
Steady growth underpins strong cash flow that supports interest payments on the firm's debt. Earnings cover the dividend well, and the valuation recognizes an encouraging outlook. I'm watching Capita for an attractive entry point, such as during periods of share-price weakness.

The firm is on my list of attractive growth opportunities along with a share that one of the Fool's top investment writers has uncovered. He has put his money where his mouth is by investing and believes the share is the "Motley Fool's Top Growth Share for 2013." In this new Fool report, you can discover how the firm has reenvisioned itself to allow for tremendous growth along new horizons. Right now, the report is free to download 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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