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 Aggreko (AGK), the power generation and temperature control equipment rental company.
With the shares at 1775 pence, Aggreko's market cap. is £4,776 million.
This table summarizes the firm's recent financial record:
|
Year to December |
2008 |
2009 |
2010 |
2011 |
2012 |
|---|---|---|---|---|---|
|
Revenue (£m) |
947 |
1,024 |
1,230 |
1,396 |
1,583 |
|
Net cash from operations (£m) |
237 |
371 |
389 |
403 |
373 |
|
Adjusted earnings per share |
46.16p |
63.3p |
79.37p |
87.14p |
100.67p |
|
Dividend per share |
10.08p |
12.6p |
18.9p |
20.79p |
23.91p |
Aggreko's directors are expecting trading during 2013 to be tougher than that experienced last year. There'll be no London Olympics contract to bolster earnings, and military-sourced revenues will fall due to U.S. troop reductions in Afghanistan. Business is also likely to decline from Japan and, taken together, such issues are likely to wipe about £100 million from 2013's top line.
Longer term the firm points to a weakening growth trend in emerging markets as a reason to be cautious. But the new trading year has started well with an 8% rise in underlying revenue, although that growth rate is unlikely to offset fully the decline from last year's strong comparative result.
Despite the director's caution for this year, Aggreko has a market-leading global presence that should drive investor total returns in the longer run. Some might see current share-price weakness as a buying opportunity despite the generous-looking price-earnings multiple, but I'm inclined to hold back.
Aggreko'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 about 4.2 times. 5/5
- Borrowings: net gearing is around 57% with net debt about 1.5 times operating profit. 3/5
- Growth: growing revenue and earnings are well supported by flat cash flow. 4/5
- Price to earnings: a forward 18 or so looks ahead of growth and yield forecasts. 2/5
- Outlook: satisfactory recent trading and a cautious outlook. 3/5
Overall, I score Aggreko 17 out of 25, which makes me a little cautious about the firm's potential to out-pace the wider market's total return, at least in the short term.
Foolish summary
A well-covered dividend, under-control borrowings, and a decent record of growth head the list of the shares attractions. The short-term outlook is cautious, but the valuation suggests that investors think the long-term growth trend remains intact.
I'm going to watch Aggreko for now, but a growth story that one of the Fool's top investment writers has uncovered tempts me. 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.
