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.
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So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at Barclays (LSE: BARC) (NYSE: BCS.US), one of Britain’s largest banking companies.
With the shares at 292p, Barclays’ market cap. is £37,660 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 21,436 | 29,954 | 32,204 | 33,033 | 25,291 |
| Net cash from operations (£m) | 33,192 | 41,844 | 18,686 | 29,079 | (13,719) |
| Adjusted earnings per share | 51.4p | 24.1p | 30.4p | 27.7p | 34.5p |
| Dividend per share | 11.5p | 2.5p | 5.5p | 6p | 6.5p |
Banking has become a messy business, and Barclays’ CEO summed the situation up nicely when he said in the last annual report, “The behaviours which made headlines during the year stemmed from a period of 20 years in banking in which the sector became too aggressive, too focused on the short-term, and too disconnected from the needs of customers and clients, and wider society.” Naturally, he included Barclays in that assessment, and conceded that the bank had suffered damage to its reputation.
Restructuring and cost control is the name of the game now, and the recent first-quarter update revealed the firm had thrown around £500m at the problem during the period, mainly to reduce the retail branch network in Europe, and to re-position the firm’s equities and investment banking operations in Asia and Europe. Before 2013 is out, the firm is expecting to incur a further £500m of such costs. The expenditure reflects in the financial figures, with adjusted earnings down 25% in the quarter. Meanwhile, the net asset value, a keenly monitored metric for banking shares, has eased by 2.2% to 405p per share, with the tangible net asset value down 5p to 344p.
With that all-important discount to asset values still in place, and the presence of a convincing turnaround plan, I remain optimistic about Barclays’ total-return prospects from here.
Barclays’ total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: despite a cash outflow, earnings covered last year’s dividend well. 3/5
2. Borrowings: net gearing from ‘external’ sources of debt is running at over 200%.2/5
3. Growth: earnings have risen despite recently declining revenue and cash flow. 2/5
4. Price to earnings: a forward seven compares well to growth and yield expectations. 4/5
5. Outlook: satisfactory recent trading and an optimistic outlook. 4/5
Overall, I score Barclays 15 out of 25, which makes me a little cautious about the firm’s potential to out-pace the wider market’s total return, going forward.
Foolish Summary
The strong scoring here relates to the forward-looking indicators, with lacklustre results in the rear-view-mirror metrics like growth. That suggests to me that potential investors need to take something of a leap-of-faith to press the ‘buy’ button. If I had spare funds, that’s something I’d probably do.
But I’m mindful of how difficult it can be to time investments in inherently cyclical shares like those in banking. So I’m also looking at shares with potential for steady total returns like those examined in a new Motley Fool report called “5 Shares To Retire On”, which highlights five shares with seemingly impregnable, moat-like financial characteristics, which our top analysts urge you to consider for your long-term retirement portfolio. They are shares that deserve consideration for any investor aiming to build wealth in the long run. For a limited period, the report is free. To download your copy now, click here.
> Kevin does not own shares in Barclays.
