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 BT Group (LSE: BT.A) (NYSE: BT.US), which is the UK's leading fixed line telecoms company.
With the shares at 241p, BT's market cap. is £18,974 million.
This table summarises the firm's recent financial record:
|Year to March||2008||2009||2010||2011||2012|
|Net cash from operations (£m)||5,486||4,706||4,825||4,566||3,558|
|Adjusted earnings per share||23.9p||16p||17.3p||21p||23.7p|
|Dividend per share||15.8p||6.5p||6.9p||7.4p||8.3p|
BT is a big player when it comes to the world's providers of communications services, active in more than 170 countries. The firm provides networked IT, telecommunications, broadband, and internet through its businesses labelled BT Global Services, BT Retail, BT Wholesale and Openreach.
Right now, the company is pushing fibre-optic cable as a means of facilitating better broadband. It's a big job, but the directors reckon that around 10m British homes and businesses are now close enough to a cable to get a connection. That said, so far, only around half-a-million have actually taken up the fibre-optic option, but BT is still the UK's biggest broadband provider, and fibre-optic services is one area of the firm's business with growth potential.
BT needs to invest in areas of growth if it is to outperform on total return. The trading environment has been tough in recent years and, looking at the figures, BT's revenue and cash flow has struggled to keep pace with earnings growth, recently.
BT Group'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 last year's dividend just under three times. 4/5
2. Borrowings: net gearing around 700% with borrowings just under four times earnings. 2/5
3. Growth: growing earnings, with flat revenue and high, but reducing, cash flow. 3/5
4. Price to earnings: a forward 9.6, which looks fair against growth and yield forecasts. 3/5
5. Outlook: satisfactory recent trading and an optimistic outlook. 3/5
Overall, I score BT 15 out of 25, which makes me cautious on the firm's potential to out-pace the wider market's total return, going forward.
There is good support for earnings from cash flow but, along with revenue, cash flow appears to be declining from its historically high levels. Positives include a well-covered dividend, recently increased by 15% by directors who pointed out that such an act demonstrates their confidence in BT's future. I'd have been better encouraged if they had hiked the dividend without comment! For the time being, then, I'm cautious about investing in BT and shall keep the shares on my watch list.
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 UK company in which the American financial wizard is currently invested. 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.