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 Hargreaves Lansdown (HL 0.46%), which is a provider of investment management products and services to private investors in the U.K..
With the shares at 919 pence, Hargreaves Lansdown's market cap. is 4,357 million pounds.
This table summarises the firm's recent financial record:
| Year to June | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (millions of pounds) | 120 | 133 | 159 | 208 | 239 |
| Net cash from operations (millions of pounds) | 35 | 57 | 72 | 84 | 123 |
| Adjusted earnings per share | 9.1p | 11.3p | 14p | 19.8p | 24.2p |
| Dividend per share | 5.49p | 7.29p | 8.58p | 12.91p | 15.75p |
Hargreaves Lansdown runs the U.K.'s largest direct-to-private-investor investment supermarket and wrap platform, and manages around 30.4 billion pounds of individual investors' assets. Services include distribution, wrap platform provision, investment management, research, provision of tax wrappers like ISAs and SIPPs, stock broking and advisory services.
The directors' reckon the firm's purchasing power helps it keep a greater share of fund providers' annual management charges than it would by fund distribution or fund platform provision alone. By passing discounts to clients, the firm aims to win business and generate customer loyalty.
Judging by the figures, the companies' strategy seems to working and growth seems set to continue. Given the current valuation, the total-return prospects for investors seem less clear.
Hargreaves Lansdown'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 the last dividend just over 1.5 times. 3/5
2. Borrowings: there is net cash on the balance sheet. 5/5
3. Growth: revenue, earnings and cash flow have all been growing steadily. 5/5
4. Price to earnings: a forward 26 seems to overstate growth and yield forecasts. 2/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score Hargreaves Lansdown 20 out of 25, which encourages me to believe the firm has potential to out-pace the wider market's total return, going forward.
Foolish Summary
With zero debt, steady growth in cash flow and a positive outlook, Hargreaves' business credentials seem impeccable and that reflects in the current valuation. Nevertheless, I think Hargreaves is interesting and I'll watch out for an entry point that makes sense.
Keeping a keen focus on a company's ability to deliver a superior total return can be a good idea, and step four in the Motley Fool's report "Ten Steps to Making a Million in the Market" asserts that "shares beat funds." I think that is good advice. In fact, I recommend the report for any ambitious investor. To download it while it is still free, and to find out the other recommended nine steps that could transform your wealth, click here.
