LONDON — 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 about 3% per annum since January 2008.
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 Marks and Spencer Group Plc (LON:MKS), which has a chain of high-street clothing and food retail stores in Britain and overseas.
With the shares at 387 pence, Marks and Spencer’s market cap. is 6.2 billion pounds.
This table summarizes the firm’s recent financial record:
| 2008 | 2009 | 2010 | 2011 | 2012 | |
|---|---|---|---|---|---|
| Revenue (millions of pounds) | 9,022 | 9,062 | 9,537 | 9,740 | 9,934 |
| Net Cash From Operations (millions of pounds) | 1,070 | 1,291 | 1,229 | 1,200 | 1,203 |
| Adjusted Earnings Per Share (pence) | 43.6 | 28 | 33 | 34.8 | 34.9 |
| Dividend per Share (pence) | 22.5 | 17.8 | 15 | 17 | 17 |
The table shows a flat financial performance over the period and tells the story of the challenges facing traditional retailers these days. Against a background of structural change in the industry, with consumers shifting to non-high-street shopping, Marks & Spencer has also had to cope with the recent economic slowdown, which has customers often trapped between falling incomes and a rising cost of living. Under such pressures, it’s natural for people to axe luxuries such as posh food and new undies from domestic budgets.
The firm is fighting back, though, and it plans to “transform Marks & Spencer from a traditional U.K. retailer to an international multi-channel retailer.” That’s a laudable goal, but a lot of work remains. Last year, although growing at an 18% clip, multichannel revenue accounted for about 6% of overall sales.
There are about 700 U.K. stores and what the company describes as an expanding international business, all of which employs some 78,000 people. The U.K. accounts for about 84% of operating profit, with the remaining 16% coming from international sales. The sales mix is something like 47% food and 53% general merchandise.
I think Marks and Spencer’s total-return potential is uncertain. If it can expand its multichannel operation, it could offset what seems like the effects of an otherwise weakening business model. However, I can’t help thinking that overall, the table for the next five years’ finances might end up looking similar to the one shown here — if we are lucky!
Marks & Spencer’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 earnings just more than twice. Score: 4/5
2. Borrowings: Net gearing of 115% with net borrowings almost four times earnings. Score: 2/5