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 (FTSEINDICES: ^FTSE) 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 United Utilities Group (UU -0.72%), the regulated water and sewage utility company operating in North West England.
With the shares at 739 pence, United's market cap. is 5,036 million pounds.
This table summarises the firm's recent financial record:
| Year to March | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 2,363 | 2,427 | 1,573 | 1,513 | 1,565 |
| Net cash from operations (£m) | 697 | 737 | 802 | 576 | 560 |
| Adjusted earnings per share | 61.2p | 26.5p | 50.8p | 35.1p | 35.3p |
| Dividend per share | 46.67p | 32.67p | 34.3p | 30p | 32.01p |
Over the last few years, United Utilities has engaged in several acquisitions and divestments, which have skewed the figures. But these days, the firm concentrates on its regulated water and sewage business in the North of England.
However, it's a capital-intensive business and, in a recent update, the firm said it expects regulatory capital investment to come in at around 750 million pounds during the current trading year, a rise of more than 10% over the year before. Indeed, the regulatory environment appears to be getting tougher, and that makes me cautious about the company's ability to outperform on total returns from here.
United Utilities' 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 just over once. 2/5
2. Borrowings: net debt is just under 10 times last year's operating profit. 1/5
3. Growth: recent revenue, earnings and cash-flow performance has been flat. 2/5
4. Price to earnings: a forward 16 or so overstates growth and yield expectations. 2/5
5. Outlook: satisfactory recent trading and a neutral outlook. 3/5
Overall, I score United 10 out of 25, and I think the firm is unlikely to out-pace the wider market's total return, going forward.
Foolish Summary
A lackluster scoring on the quality metrics combines with overvaluation to keep me from buying shares in United Utilities.
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