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 Mondi (LSE: MNDI), the paper and packaging company.
With the shares at 1065p, Mondi’s market cap. is £3,911 million and there’s a dual listing on the Johannesburg Stock Exchange (JSE).
This table summarises the firm’s recent financial record:
| Year to | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (€m) | 6,345 | 5,257 | 5,610 | 5,739 | 5,807 |
| Net cash from operations (€m) | 726 | 837 | 734 | 834 | 740 |
| Adjusted earnings per share (cents) | 33.9 | 18.7 | 47 | 69.9 | 69.6 |
| Dividend per share (cents) | 12.7 | 9.5 | 20 | 26 | 28 |
Mondi’s paper and packaging business began to spread from its South African origins in the early 1990s, and the level of debt that the firm carries seems to reflect the acquisitive approach the firm has applied to expansion. In 2007, demerger from Anglo American plc saw the company emerge in its current dual-listed independent form.
Last year around 43% of revenue came from Western Europe and 21% from emerging Europe, which shows just how far the firm has grown. Just 11% came from the firm’s original country of operations, Africa.
It seems clear from the table that an element of cyclicality exists in the firm’s markets, which suggests that Mondi is not a buy-and-forget investment proposition. Those seeking reliable ongoing total returns should keep that in mind.
Mondi’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 2.5 times. 4/5
2. Borrowings: net debt is running at around 3.4 times the level of operating profit. 2/5Â Â Â Â Â Â Â Â Â
3. Growth: robust cash flow results from rising revenue. Earnings look flat. Â 4/5
4. Price to earnings: a forward 12 or so compares well to growth and yield expectations. 4/5
5. Outlook: good recent trading and an optimistic outlook. 4/5
Overall, I score Mondi 18 out of 25, which encourages me to believe the firm has some potential to outpace the wider market’s total return, going forward.
Foolish summary
Dividend cover is good and debt is a little high for my liking. The figures suggest cyclical recovery is under way, but the directors still see potential headwinds.