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 Persimmon (LSE: PSN), the UK-focused house builder.
With the shares at 1122p, Persimmon’s market cap. is £3,403 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 1,755 | 1,421 | 1,570 | 1,535 | 1,721 |
| Net cash from operations (£m) | 244 | 353 | 226 | 122 | 182 |
| Adjusted earnings per share | 35.3p | 2.1p | 24.8p | 36.8p | 57.6p |
| Dividend per share | 5p | 0 | 7.5p | 10p | Capital return |
Cyclical recovery continues apace at Persimmon. The recent interim report revealed revenue up 12%, earnings per share up 35% and cash inflow from operations up 38%, all compared to a year ago.
Encouragingly, forward sales are up 21% too, and the director’s reckon that the firm is seeing a gradual improvement in the UK mortgage market, citing recent Bank of England data that shows a, roughly, 20% increase in mortgage approvals in May and June this year compared to the same period last year.
Those forward sales are important to support Persimmon’s Capital Return Plan. Investors recently saw an inaugural return of 75p a share under the plan, and had the choice of either a special dividend or a capital refund. The director’s now propose to pay investors 10p per share in June 2014 as part acceleration of 2015’s 95p payment.
Ditching the dividend policy in favour of the Capital Return Plan sent the market a clear signal in terms of the company’s forward earnings expectations and the share price has more than doubled since I last wrote about Persimmon during May 2012. However, although the plan indicates a total shareholder return of £6.20 per share, investors will have to wait until 2021 to get the full amount, and some years do not have a payment scheduled. It’s also possible that each repayment could attract a corporate action charge within your share account, so it’s worth checking with your provider.
Despite such inconveniences compared to a straightforward normal annual dividend, I’m still optimistic about the company’s potential to outperform on total investor returns from here.
Persimmon’s total-return potential
Let’s examine five indicators to help judge the quality of the company’s total-return potential:
1. Dividend cover: earnings covered the recent 75p/share capital return around 0.8 times. 1/5
2. Borrowings: the recent interim balance sheet shows net cash. 5/5
3. Growth:revenue, earnings and cash flow have all been growing recently. 5/5
4. Price to earnings: a forward 12 or so compares well to earnings growth expectations. 5/5
5. Outlook: robust recent trading and a positive outlook. 5/5
Overall, I score Persimmon 21 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
Zero borrowings, robust earnings growth, a positive outlook and a modest-looking valuation all combine to make me bullish on Persimmon.
