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 Travis Perkins (LSE: TPK), the UK-focused building materials supplier.
With the shares at 1,600p, Travis Perkins’s market cap. is £3,920 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 3,179 | 2,931 | 3,153 | 4,779 | 4,845 |
| Net cash from operations (£m) | 209 | 233 | 215 | 295 | 236 |
| Adjusted earnings per share | 122.9p | 75.2p | 77.2p | 93.1p | 95.1p |
| Dividend per share | 14.5p | 0 | 15p | 20p | 25p |
The prominent point about distributors is that they tend to follow the fortunes of the industries to which they distribute. From an investment point of view, there is some attraction in that. Travis Perkins is a good example within the building supplies sector. But although selling ‘picks and shovels’ to those risking their capital and resources at the ‘coal face’ of the building industry can earn a few quid, it’s also highly cyclical, so investment timing is essential to maximise total returns from a company like Travis Perkins
Over its 200 year history, the firm has steadily grown, both organically and acquisitively. In recent years, the company’s size has enabled it to become an industry consolidator, with many well-known names in its stable of brands, such as Keyline, PTS, BSS, Wickes and, of course, Travis Perkins. There are now around 1,800 outlets operating around the country.
Despite such growth, cyclicality was evident during 2009 when a Rights Issue to pay down debt diminished investors’ stakes in the firm by about a third. That year, there was no dividend too. It was a tough time to be an existing investor and a great time to be a new investor as the shares traded at around 200p – about an eighth of where they are now. That’s a great four-year run, but the cyclical investing case for Travis Perkins is much less certain now.
Travis Perkins’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 3.8 times. 5/5
2. Borrowings: net debt is running at around 1.4 times the level of operating profit. 4/5Â Â Â Â Â Â Â Â Â
3. Growth: revenue and earnings have grown beside flat-looking cash flow. 3/5
4. Price to earnings: a forward 14 seems up with growth and yield expectations. 3/5
5. Outlook: satisfactoryrecent trading and an optimistic outlook. 3/5
Overall, I score Travis Perkins 18 out of 25, which encourages me to believe the firm has some potential to out-pace the wider market’s total return, going forward.