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 International Consolidated Airlines Group (LSE: IAG), the airline.
With the shares at 360p, International Consolidated Airline’s market cap. is £7,334 million.
This table summarises the firm’s recent financial record:
| Year to December | 2011 | 2012 |
|---|---|---|
| Revenue (€m) | 16,103 | 18,117 |
| Net cash from operations (€m) | 770 | 339 |
| Adjusted earnings per share (cents) | 29.53 | (23.37) |
| Dividend per share (cents) | 0 | 0 |
The formation of IAG in January 2011, with the aim of working towards global consolidation in a troubled industry, seemed to lead to prince British Airways marrying one of the ugly stepsisters in Iberia, with Cinderella avoiding the wedding!
According to IAG’s CEO, Iberia performed badly during 2012, suffering from a lack of competitiveness and requiring root and branch analysis, transformation and restructuring. That kind of scenario presents the investor with both opportunity and threat. The threat is that the Iberia business defeats management turnaround efforts. The opportunity is that management succeeds and achieves the cost and revenue synergies it expects in the combined business.
Recent trading figures and the share-price performance during 2013, indicate the firm is enjoying some progress with its turnaround programme and a move to profitability looks likely soon. When the main alliance is safely out of turbulence, the company can confidently look ahead to progress its acquisition plans, like the example of British Midland Limited, acquired in April 2012. That acquisition included some valuable long-haul slots at Heathrow airport, which the firm aims to use to develop further business. Then, in 2013, the firm added Spanish low cost carrier Vueling.
However, despite recent progress I’m nervous about the long-term total-return potential for investors. The industry is heavily cyclical and it’s hard to time a good investment entry point.
International Consolidated Airline’s total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: zero dividend means no draw on cash. 5/5
2. Borrowings: net debt is about 4.4 times 2014’s expected earnings. 1/5           Â
3. Growth: rising revenue, declining earnings and cash flow. 1/5
4. Price to earnings: a forward 12 anticipates a sharp move to profitability. 3/5
5. Outlook: good recent trading and a cautiously optimistic outlook. 4/5
Overall, I score the company 14 out of 25, which inclines me to be cautious about the firm’s potential to out-pace the wider market’s total return over the long haul.
Foolish summary
The absence of dividend continues, and borrowings are too high for my taste. Although looking perkier now, the growth score reveals recent profit and cash flow difficulties. The P/E rating anticipates a successful turnaround in fortunes, which recent trading figures and a positive outlook seem to support. However, there is no obvious bargain here.