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 about 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 Imperial Tobacco Group (LSE: IMT.L) (NASDAQOTH: ITYBY), the cigarette and tobacco products manufacturer.

With the shares at 2362 pence, Imperial's market capitalization is £23 billion.

This table summarizes the firm's recent financial record:







Revenue (millions of pounds)






Net cash from operations (millions of pounds)






Adjusted earnings per share (pence)






Dividend per share (pence)






With its recent halftime results, Imperial Tobacco posted a 22.7% drop in earnings per share, a 9.7% decline in operating profit, and a 4.2% revenue contraction in comparison with the prior-year quarter. The firm pointed to difficult trading conditions in the EU as a reason for the disappointing performance, despite good results in the U.K. and Germany and a strong total tobacco performance from key brand JPS and fine-cut tobacco. A declining market in Russia and problems in the U.S. also contributed to the company's woes.

Although Imperial has some 46 manufacturing sites and operates in more than 160 markets employing about 36,000 people, it's known that industry volumes are in long-term decline. Could it be that these latest results presage more difficult times ahead for a company that investors have long seen as a steady growth proposition?

Despite the projected 5.4% dividend yield, I'm cautious about Imperial's total-return potential from here.

Imperial Tobacco'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 almost twice. Score: 3/5
  2. Borrowings: Net borrowings are about 7.3 times the level of operating profit. Score: 1/5
  3. Growth: Cash flow supports growing earnings and flat revenue. Score: 3/5
  4. Price to earnings: A forward 11 or so compares well to growth and yield expectations. Score: 4/5
  5. Outlook: Recent trading has been difficult, but the outlook is optimistic. Score: 3/5

Overall, I score Imperial Tobacco 14 out of 25, which inclines me to be cautious about the firm's potential to out-pace the wider market's total return, going forward.

Foolish summary
Imperial relies on steady cash flow to keep on top of its high debt-interest payments. The quality metric scores generally hit the middle ground, and the valuation looks fair.

The firm's dividend and growth outlooks aren't enough to tempt me into buying, but an idea from The Motley Fool's top value investor is interesting. He has discovered what he believes is the best income-generating play for 2013. He sets 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.