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 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 Johnson Matthey PLC (LON:JMAT), the platinum-focused chemical company.
With the shares at 2,632 pence, Johnson Matthey PLC (LON:JMAT)’s market cap. is £5,393 million.
This table summarizes the firm’s recent financial record:
|Year to March||2009||2010||2011||2012||2013|
|Net cash from operations (£m)||501||276||123||464||396|
|Adjusted earnings per share||89.6p||86.4p||119p||153.7p||150p|
|Dividend per share||37.1p||39p||46p||55p||57p|
The recent full-year results reveal that 2012 was a difficult trading year for Johnson Matthey PLC (LON:JMAT). After several periods of steady revenue and earnings growth, the figures were down, mainly due to a poor performance in the firm’s Precious Metal Products division. With operations in around 30 countries and employing about 10,000, the company manufactures catalysts and components for vehicles, pollution control systems, fuel cells and chemical processes. It also produces chemicals and catalysts for the pharmaceutical industry, and is active in marketing, refining and fabricating precious metals.
Johnson Matthey PLC (LON:JMAT) had become used to constantly improving results in recent times. Such confidence led to the company returning £1 per share to investors as a special dividend in 2012. There was no special dividend this year, though, but the directors expect the firm to make steady progress in 2013/14, with medium term growth accelerating in 2014/15 and beyond. Such predictions arise due to tighter vehicle emissions legislation and demand for process technologies’ products, especially in China, they say. Manfully, they hiked the dividend by 4% this year to demonstrate the strength of their conviction.
I’m more cautious and shall wait for a share price retreat before buying.
Johnson Matthey’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 around 2.6 times. 4/5
2. Borrowings: net debt is running at around 2.3 times the level of operating profit. 3/5
3. Growth: good cash-flow support for recently easing revenue and earnings. 2/5
4. Price to earnings: a forward 15 is a little ahead of growth and yield expectations. 2/5
5. Outlook: disappointing recent trading and an optimistic outlook. 3/5
Overall, I score Johnson Matthey PLC (LON:JMAT) 14 out of 25, which inclines me toward caution when it comes to the firm’s potential to out-pace the wider market’s total return, going forward.
Although there is good dividend cover from earnings, growth has stalled recently and the valuation seems to be looking beyond such ‘temporary’ inconveniences. The outlook is bullish in the medium to long term, which makes me cautious about the short term. I’m content with watching the shares for the time being.
The article Should I Invest in Johnson Matthey? 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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