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 during recent weeks I’ve looked at SSE (LSE: SSE), Vedanta Resources (LSE: VED), Old Mutual (LSE: OML), InterContinental Hotels Group (LSE: IHG) and Persimmon (LSE: PSN). This is how they scored on my total-return-potential indicators (each score in the table is out of a maximum of 5):
| Share | SSE | Vedanta | Old Mutual | InterContinental | Persimmon |
|---|---|---|---|---|---|
| Dividend cover | 3 | 4 | 4 | 4 | 1 |
| Borrowings | 3 | 1 | 4 | 4 | 5 |
| Growth | 4 | 3 | 3 | 3 | 5 |
| Price to earnings | 3 | 3 | 4 | 1 | 5 |
| Outlook | 3 | 4 | 4 | 5 | 5 |
| Total (out of 25) | 16 | 15 | 19 | 17 | 21 |
Energy utility
A diverse gas and electricity supply business supports a forward 6.3% dividend yield at SSE. Around 54% of operating profit comes from electricity distribution in the North of Scotland and Southern England, roughly 32% comes from electricity and gas supply contracts, and about 14% comes from gas production, distribution and storage. Last year, the firm’s capital-intensive electricity-generating operations, which include renewable and thermal plants in the UK, Ireland and Europe, delivered a loss. But I like the breadth of the business, so remain optimistic on investor total returns from here.
Natural resources
India delivered 63% of overall revenue to Vedanta Resources last year and China, 14%, so the firm is a potential emerging-market play. Last year, 40% of operating profits came from oil & gas production, 46% from zinc, and 8% from copper. But volatile commodity prices, the firm’s large debt-pile, and the chairman’s controlling interest keep me from digging into the shares.
Insurance and financial services
Recent robust growth in earnings from emerging markets is encouraging at Old Mutual. The general insurance, asset management and banking firm derived around 72% earnings from up-and-coming regions last year. That inclines me to be optimistic about potential investor total returns from here, particularly in light of the forward dividend yield, running at around 5%.
Hotels
InterContinental Hotels has grown by rolling out a business model where most of the firm’s hotels operate under a franchise agreement, or InterContinental manages them on behalf of owners. It’s a successful formula, and last year around 50% of revenue came from the Americas, 30% from Europe, 12% from Asia, the Middle East and Africa, and 13% from China. Although the firm is growing in some interesting, potentially fast-growing markets, the current valuation makes me nervous about investor total returns from here.
House building
With forward sales recently up 21% and a great set of interim results, Persimmon is recovering well and seems to be benefiting from what the directors describe as a gradual improvement in the UK mortgage market. Despite a strong share-price performance over the last year, I’m still optimistic about the company’s potential to outperform on total investor returns from here.
