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 Schroders (SDR -1.64%), the fund management company.
With the shares at 2169 pence, Schroders' market cap. is 5,876 million pounds.
This table summarizes the firm's recent financial record:
|Year to December||2008||2009||2010||2011||2012|
|Revenue (millions of pounds)||936||769||1439||1,502||1,425|
|Net cash from operations (millions of pounds)||134||371||1,067||427||489|
|Adjusted earnings per share||75.5p||56.7p||111.8p||115.9p||104.7p|
|Dividend per share||31p||31p||37p||39p||43p|
Last year, Schroders earned 97% of its revenues in asset management fees and just 3% from private banking. The firm, which describes itself as a global asset management company, saw a net inflow of funds under management of 9.4 billion pounds during the year, taking the total to 212 billion pounds.
That's a big chunk of money invested by institutions and individuals from around the world upon which Schroders can charge a handling fee. In fact, 86% of revenue came from such management fees last year, with just 2% earned by performance fees, and 12% from other sources.
So the company doesn't derive its current prosperity from investment performance at all. Given the volatility of markets, that's reassuring. However, the funds-under-management metric is important to monitor because Schroders' earning power depends on it.
Given the current low base, any improvement in fund performance could provide a welcome boost to earnings via performance fees, but it's not the flour and raisins, just the frosting on top!
Schroders' 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 2.4 times. 4/5
2. Borrowings: net gearing is about 2% with net debt around 12% of operating profits. 4/5
3. Growth: rising cash flow well-supports flat revenue and earnings. 3/5
4. Price to earnings: a forward 15 or so compares well to growth and yield forecasts. 4/5
5. Outlook: year-on-year profits down recently and the outlook is cautiously optimistic. 3/5
Overall, I score Schroders 18 out of 25, which encourages me to believe the firm has some potential to out-pace the wider market's total return, going forward.
Strong cash flow backs good dividend cover, and the firm has little debt. Although the outlook is cautious, the net inflow of client funds is encouraging. The valuation seems undemanding given forecasts for growth and a dividend yield expected to be around 2.5% in 2014 at the current share price.
That growing yield looks attractive, but I'm more likely to buy a share idea from the Motley Fool's top value investor who has discovered what he believes is the best income generating share-play for 2013. He set's out his three-point investing thesis in a report called "The Motley Fool's Top Income Share for 2013," which I recommend you download now. For a limited time, the report is free so, to download it immediately, and discover the identity of this dividend-generating star, click here.