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 The British Land Company (LSE: BLND), the UK-focused real estate investment trust.
With the shares at 602p, British Land’s market cap. is £5,980 million.
This table summarises the firm’s recent financial record:
| Year to March | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Revenue (£m) | 554 | 394 | 298 | 332 | 329 |
| Net cash from operations (£m) | 205 | 136 | 210 | 206 | 190 |
| Adjusted earnings per share | 41.13p | 28.4p | 28.5p | 29.87p | 30.49p |
| Dividend per share | 34.62p | 26p | 26p | 26.1p | 26.4p |
Around 60% of British Land’s £10.5 billion of assets are in the retail sector, 36% are offices and about 4% are other types of property. The firm focuses on what it calls high quality UK retail locations and London offices for the liquidity and growth potential on offer in those markets.
By investing in good quality buildings in prime locations, then managing them to a high standard in accordance with occupier needs, the firm aims to create value by making its rentable space more desirable. That then reflects in rising rents and capital values.
However, earnings can be volatile and cyclical in the property business, which seems to show up in the recent dividend record. Although the forward P/E looks quite high right now at around 18, improvements in rental income and upward property revaluations could bring that figure down as the economic cycle continues to unfold.
The shares are currently trading around the recently declared net asset value per share of 596p, suggesting the market is placing a neutral valuation on the shares. At around 4.6%, the forward dividend yield looks tempting, and I’m optimistic about British Land’s total-return prospects from here.
British land’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 just over 1.15 times. 5/5
2. Borrowings: net gearing about 79% with interest covered around 2.8 times by earnings 3/5
3. Growth: earnings recently rose despite flat revenue and falling cash flow. 3/5
4. Price to earnings: a forward 18 or so suggests earnings are far from the peak of cycle. 3/5
5. Outlook: satisfactory recent trading and a cautiously positive outlook. 4/5
Overall, I score British land 18 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return, going forward.
Foolish Summary
Dividend cover just above one hits the target under REIT rules. Borrowings seem under control and well supported by asset values. The outlook is encouraging, and the forward dividend yield of around 4.6% is tempting. That encourages me to believe that, yes, I should invest in British Land.
Indeed, British Land is on my list of attractive dividend growth opportunities along with a share picked by the Motley Fool’s top value investor, as what he believes is the best income generating share-play for 2013. He set’s out his three-point investing thesis in a report called “The Motley Fool’s Top Income Share For 2013”, which I recommend you download now. For a limited time, the report is free so, to download it immediately, and discover the identity of this dividend-generating star, click here.
> Kevin does not own shares in The British Land Company.
