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 Babcock International Group (BAB -1.15%), the engineering support services company.
With the shares at 1076p, Babcock's market cap is £3,903 million.
This table summarises the firm's financial performance over the last few years:
| Year to March | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 1,556 | 1,902 | 1,896 | 2,565 | 2,848 |
| Net cash from operations (£m) | 89 | 117 | 150 | 239 | 196 |
| Adjusted earnings per share | 33.4p | 41.9p | 51.37p | 52.5p | 61.47p |
| Dividend per share | 11.5p | 14.4p | 17.6p | 19.4p | 22.7p |
In a recent update, Babcock revealed that next month's full-year results will show a decent trading advancement over the previous year. That's already shown in further progress on debt-reduction. It's the kind of result we've become used to seeing, as Babcock succeeds in converting its £15.5 billion bid-pipeline into orders.
The order book currently stands at around £12 billion and, right now, examples of preferred bidder announcements include a ground-fleet maintenance contract for British Airways, baggage handling operations and maintenance for Heathrow Airport, and weapons handling and launch equipment for an international customer.
With such a diverse range of opportunity, Babcock's total-return prospects continue to look interesting.
Babcock'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 2.7 times. 4/5
2. Borrowings: net debt is around 2.9 times the level of last year's operating profit. 3/5
3. Growth: steady revenue and earnings growth well supported by cash flow. 4/5
4. Price to earnings: a forward 14 or so looks a little ahead of growth and yield forecasts. 2/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score Babcock 18 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
A full-looking valuation tempers good scoring on the quality metrics, so I'm going to watch the shares for now.
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