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 Standard Life (LSE: SL), the financial services provider and investment company.
With the shares at 346p, Standard Life’s market cap. is £8,230 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 3,564 | 3,296 | 3,244 | 3,343 | 4,315 |
| Net cash from operations (£m) | 2,304 | (1,716) | (4,082) | 2,390 | (2,226) |
| Adjusted earnings per share | 7.9p | 7.5p | 18.4p | 13p | 29.7p |
| Dividend per share | 11.77p | 12.24p | 13p | 13.8p | 14.7p |
I tend to think of financial companies like Standard Life by analogy — as ‘a rowing boat bobbing precariously on a choppy, windswept lake’, for example.
The rowing boat equates to Standard Life’s operating business, which last year delivered fee, commission and other revenues of £983m. The choppy, windswept lake is the investment business, which carries around £232 billion of assets. Here, the firm invests its customers’ money to earn an investment return, like last year’s £13,982 million ‘top-line’ contribution.
Such investments in equities, property, company debt and the like, around the world, are the real earners for Standard Life. Direct profitability on the SIPPs, pensions, savings products, investment bonds and insurances that the firm provides becomes almost irrelevant as profit on investment saves the day.
However, relying on that large invested capital sum carries risks: when big underlying amounts of money move a little, big differences can result in smaller amounts of income generated. Standard Life puts it like this:
“The shareholder [in Standard Life] is directly exposed to the impact of market movements in property prices, interest rates and foreign exchange rates and the impact of defaults and movements in credit spreads on the value of assets held by the shareholder business.”
To invest in a firm like Standard Life, I think you have to take a view on where financial, equity and property markets might be heading. The total-return outcome for Standard Life investors largely depends on such movements.
My view is neutral.
Standard Life’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 twice. 4/5
2. Borrowings: direct borrowings are running at about twice the level of operating profit. 3/5
3. Growth: recently growing revenue and earnings, and volatile cash flow. 2/5
4. Price to earnings: a forward 14 seems to recognise growth and yield expectations. 3/5
5. Outlook: good recent trading and an optimistic outlook. 5/5
Overall, I score Standard Life 17 out of 25, which inclines me to ambivalence about the firm’s potential to out-pace the wider market’s total return, going forward.
Foolish Summary
Dividend cover seems good and the firm has been enjoying decent trading as individuals return to the financial markets. The volatile cash flow seems to support my choppy, windswept lake simile, as the waters of the firm’s finances churn below the surface, in the dark!
