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Should I Invest in British Sky Broadcasting Group plc (BSY)?

British Sky Broadcasting Group plcLONDON — 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 British Sky Broadcasting Group plc (LON:BSY), the satellite broadcasting company.

With the shares at 779 pence, British Sky Broadcasting Group plc (LON:BSY)’s market cap is 12,441 million pounds.

This table summarizes the firm’s recent financial record:

Metric 2008 2009 2010 2011 2012
Revenue (millions of pounds) 4,952 5,359 5,709 6,597 6,791
Net cash from operations (millions of pounds) 877 1,074 1,364 1,357 1,500
Adjusted earnings per share 25.1 pence 25.9 pence 32.1 pence 41.6 pence 50.8 pence
Dividend per share 16.75 pence 17.6 pence 19.4 pence 23.28 pence 25.4 pence

Year to June.

With revenue up 6% and adjusted operating profit up 9%, the recent three-quarter results reveal that British Sky Broadcasting Group plc (LON:BSY)’s multi-product approach is paying off. Positive outcomes include rapid growth in subscriptions to Internet-connected HD satellite TV boxes, up 35% to 2.3 million in the last quarter alone, and a 500% increase in year on year on-demand downloads to an average of 4.5 million a week.

The subscription model leads to reliable and repeatable cash flows as customers tend to stick with the service. Churn rates are as low as an annualized 10.8%, and around 34% of consumers take a full offering of TV, broadband and telephony services, up from 31% a year ago.

Such steady growth is encouraging and makes me optimistic about the company’s ability to deliver decent investor total returns from here.

BSkyB’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 twice. 4/5

2. Borrowings: net debt is around 1.5 times the level of operating profit. 4/5

3. Growth: revenue, earnings and cash flow have all grown steadily over the period. 5/5

4. Price to earnings: a forward 13 looks ahead of growth and yield expectations. 2/5

5. Outlook: good recent trading and an optimistic outlook. 4/5

Overall, I score British Sky Broadcasting Group plc (LON:BSY) 19 out of 25, which encourages me to believe the firm has some potential to out-pace the wider market’s total return, in the long run.

Foolish Summary
With under-control borrowings, decent dividend cover, a record of steady growth and an optimistic outlook, there are many positives. However, the valuation does look a little full so I’m keeping the shares on watch for the time being.

The article Should I Invest in British Sky Broadcasting Group? originally appeared on Fool.com and is written by Kevin Godbold.

Kevin Godbold has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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