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, today, I'm looking at Intertek Group (ITRK 1.59%), the testing, inspection, and certification services company.
With the shares at 3,115 pence, Intertek's market cap. is 5,016 million pounds.
This table summarises the firm's recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (million pounds) | 1,004 | 1,237 | 1,374 | 1,749 | 2,054 |
| Net cash from operations (million pounds) | 141 | 203 | 194 | 213 | 234 |
| Adjusted earnings per share (pence) | 67.8 | 83 | 91 | 109.1 | 133.1 |
| Dividend per share (pence) | 20.8 | 25.5 | 28.1 | 33.7 | 41 |
In a recent update, Intertek reported a mixed bag of trading results during the first quarter of 2013. Although revenues were up around 10%, the directors are expecting a flat result on profits for the whole year thanks to declining business related to worldwide mining activities. Meanwhile, other sectors are growing well, like oil, gas, power, and renewables, which is an area that continues to experience inward capital investment, resulting in demand for Intertek's services.
The firm employs around 33,000 in more than 100 countries to deliver its testing, inspecting, and certifying products and services. It's a decent, cash-generating business, and the company should continue to benefit from its diversified markets as they cycle up and down.
There's a good track record of growth, and the firm spent 9 million pounds on acquisitions during the quarter. Citing a pipeline of acquisition opportunity, the directors seem to have an eye on further expansion, and I'm optimistic about the company's total-return prospects from here.
Intertek's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:
- Dividend cover: Adjusted earnings covered last year's dividend over three times. 5/5
- Borrowings: Net debt is running at just under twice the level of operating profit. 4/5
- Growth: Stable cash flow slightly lags behind steadily growing revenue and earnings. 4/5
- Price to earnings: A forward 18 or so seems ahead of growth and yield expectations. 2/5
- Outlook: Satisfactory recent trading and a cautiously positive outlook. 4/5
Overall, I score Intertek 19 out of 25, which encourages me to believe the firm has potential to outpace the wider market's total return over the long haul.
Foolish summary
This is a good scoring on my business-quality indicators, although the valuation seems a little rich.
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