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 Standard Chartered (LSE: STAN) (NASDAQOTH: SCBFF.US), the international banking company.
With the shares at 1,596p, Standard Chartered’s market cap. is £38,668 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue ($m) | 13,968 | 15,184 | 16,062 | 17,637 | 19,071 |
| Net cash from operations ($m) | 23,730 | (4,754) | (16,635) | 18,370 | 17,880 |
| Diluted earnings per share (cents) | 201.3 | 159.3 | 193 | 198.2 | 197.7 |
| Dividend per share (cents) | 61.62 | 63.61 | 69.15 | 76 | 84 |
The recent half-time results statement trumpeted a good set of financial numbers all heading in the desired direction, but Standard Chartered’s directors pointed to Hong Kong, India and Africa as being the star-performing geographical regions, riding on the shoulders of a steady performance just about everywhere.
And ‘everywhere’ to the UK-headquartered bank means primarily the regions of Asia, Africa and the Middle East, where 90% of the firms business takes place. So a bet on Standard Chartered means a bet on emerging markets, and the company reckons it can trace its heritage back through 150 years of trading in such areas, so investors could be in experienced hands.
The company appears to have coped well with banking’s recent harsh financial winter; no doubt that’s down to its self-declared obsession with getting the basics right. I think I’m a believer, which makes me optimistic about the total-return outlook from here.
Standard Chartered’s total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: diluted earnings covered last year’s dividend around 2.4 times. 4/5
2. Borrowings: net debt from exterior sources running around six times operating profit. 1/5
3. Growth: cash flow supports growing revenue and flat-looking earnings. 4/5
4. Price to earnings: a forward ten seems to understate growth and yield expectations. 4/5
5. Outlook: good recent trading and a positive outlook. 5/5
Overall, I score Standard Chartered 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
Earnings provide substantial dividend cover and there is a track record of recent growth in the financial numbers. Although debt seems high, banks usually do carry a lot of gearing and if you are going to gear up, this seems like the right place in the economic cycle to do so. The valuation and outlook combine with a forward dividend yield of around 4% to tempt me to buy shares in Standard Chartered.
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> Kevin does not own shares in Standard Chartered. The Motley Fool owns shares in Standard Chartered.
