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 Sports Direct International (LSE: SPD), the sports goods retailer.
With the shares at 687p, Sports Direct’s market cap. is £4,105 million.
This table summarises the firm’s recent financial record:
| Year to April | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue (£m) | 1,367 | 1,452 | 1,599 | 1,836 | 2,186 |
| Net cash from operations (£m) | 92 | 165 | 184 | 165 | 114 |
| Adjusted earnings per share | 7.93p | 12.39p | 16.83p | 19.19p | 26.85p |
| Dividend per share | 1.22p | 0 | 0 | 0 | 0 |
Sports Direct’s spectacular growth over the thirty-odd years since its establishment seems to reflect sportswear’s migration to mainstream fashion. Indeed, the successful supplier of hoodies, baggy tracksuit bottoms, baseball caps, pumps and other fashionable apparel now operates more than 500 stores.
Last year, 85% of the firm’s operating profit came from its UK retailing operation. My guess is that rapid UK growth cannot continue indefinitely so investors will have there eye on international expansion, which is in a fledgling stage delivering just 1.7% of profits. Another potential growth area is brand ownership. Sports Direct has been acquiring sports brands such as Lonsdale, Slazenger, Dunlop, Karrimor and Donnay from mainly distressed parent-company sellers, such as those in receivership. The firm sells its brands retail, wholesale, and by licensing agreement. The brand operation contributed about 9% of operating profit last year.
Although Sports Direct’s growth seems to be continuing its sprint, I’m cautious on the shares and worried about potential P/E compression, which could neutralise share-price progress even if earnings’ growth continues.
Sports Direct’s total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: the firm has not been spending its cash on any dividend payments. 5/5
2. Borrowings: net debt is running at about 72% of the level of operating profit. 4/5Â
3. Growth: growing revenue and earnings, and weak cash flow. 3/5
4. Price to earnings: a forward 17.5 recognises growth and yield expectations. 3/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score Sports Direct 20 out of 25, which encourages me to believe the firm has some potential to out-pace the wider market’s total return, going forward.
Foolish Summary
Although borrowings seem under control, there’s no dividend. Cash flow seems to struggle to support earnings, and the valuation seems to account for growth expectations. The director’s continue to be optimistic.