Should I Invest In Rexam?

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 Rexam (LSE: REX), which is one of the world's top five consumer packaging companies.

With the shares at 465p, Rexam's market cap. is £4,082 million.

This table summarises the firm's recent financial record:

About 90% of Rexam's business is making beverage cans. The remaining 10% of revenue comes from making plastic packaging. The firm produces drinks cans on a massive scale from some 66 plants in 22 countries and employs around 11,000 to keep operations ticking over. However, there's a fair amount of cyclicality to the firm's business and when demand faltered in the wake of the credit crisis, debt of some £2.6bn became problematic and the company engaged in a Rights Issue during 2009 to shore up its balance sheet. We can see the effect of that in the reduced earnings-per-share figures in the table, and evidence of greater director caution in the rebased dividend.

Since then, the figures seem to suggest that there has been something of a recovery with most of the problems confined to the 2009 trading year. The directors have been focusing on cost control, which has seen the underlying profitability of the business continue to grow, despite a reduced return to shareholders since the Rights Issue, which diluted investors interests by about 30%. If such growth can continue, investors might see a decent total return ahead.

Rexam'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 2.5 times. 4/5

2. Borrowings: net gearing is around 64% with borrowings about 3.5 times earnings. 2/5

3. Growth: growing revenue and earnings since 2009 with good support from cash flow. 4/5

4. Price to earnings: a forward 11 seems fair compared to growth and dividend forecasts 3/5

5. Outlook: satisfactory recent trading and a cautiously positive outlook. 4/5

Overall, I score Rexam 17 out of 25, which encourages me to believe that, given favourable macro-economic conditions, the firm has potential to out-pace the wider market's total return, going forward.

Foolish Summary

Although debt is still quite high since the fun raising event in 2009, it seems manageable, and Rexam's cash flow has been strong, which should help the company manage interest payments. At the last count, net debt stood at about £1.35 billion, just about half the level that caused the firm difficulties. Earnings growth has been steady and there is decent dividend cover. The outlook is encouraging.

However, I like to buy into companies when the shares offer a bargain and, right now, I think the shares price Rexam fairly, so I won't be investing for the time being. That said, I'm enthusiastic about other FTSE 100 companies, right now, and on one selection I find myself in the company of master investor Warren Buffett. In fact, the company in question is the only public UK company in which the American financial wizard currently holds shares. You can find out why in the Motley Fool's report "The One UK Share That Warren Buffett Loves." For a limited period, the report is free, so Click Here to download your copy and find out the identity of the one UK share that screams 'buy' to so many, now.