Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Should You Buy Capita PLC (CPI) Today?

LONDON — Shares in British outsourcing behemoth Capita PLC (LON:CPI) have been extremely volatile over the past five years. More recently, the stock has gradually edged higher during the course of the last 12 months, before collapsing 6.7% from early April’s all-time peak of 913.5 pence to current levels.

I believe the shares should resume their march higher in the near term, however, as solid earnings potential and an increasingly lucrative dividend policy once again whet investors’ appetites.

Juicy growth noted in 2012
Capita PLC (LON:CPI) announced in February an organic growth rate of 3% for 2012, which snapped back from the 7% decline seen in the previous year and helped to drive pre-tax profits 10% higher to 472 million pounds.

The company also noted that contract wins doubled to 4 billion pounds during 2012. Meanwhile, the sales pipeline leapt to 5.2 billion pounds as of the time of the release vs. 4.8 billion pounds in November. The current pipeline now spans 27 separate bids with an average life of nine years, figures that provide excellent long-term revenue visibility for investors.

Although Capita PLC (LON:CPI) warned of lower margins moving forward — underlying operating margins dropped to 14.07% last year from 14.59% in 2011, and further margin pressure was cited for 2013 — I believe the company should continue to win new business to offset the squeeze and keep earnings growing.

An attractive all-round stock selection
City analysts expect earnings per share to rise 6% in 2013, to 57 pence, before advancing a further 9% the following year to 62 pence.

In addition, the company has a solid track record of chunky dividend rises in recent times — full-year dividends over the past five years have printed a compound annual growth rate of 14% — and this record is expected to carry on into the medium term.

Last year’s payout of 23.5 pence per share, itself 10% higher from 2011 levels, is set to advance to 25.6 pence per share this year before accelerating to 27.9 pence per share in 2014, according to broker estimates.

These payments carry yields below the current FTSE 100 income of 3.3%, at 2.9% and 3.2% for this year and next, but I expect steady earnings growth to push shareholder returns above this level in coming years.

Furthermore, prospective dividends for the next two years come well protected with coverage of 2.2 times forward earnings for 2013 and 2014, above the security touchstone of 2 times.

Capita PLC (LON:CPI) currently trades on a P/E rating of 15.1 for this year, which is forecast to drop to 13.8 in 2014. Both projections are far below the forward earnings multiple of 21 for the entire support services sector. In my opinion, the P/E forecasts represent stunning value for investors given the company’s excellent growth prospects and commitment to swelling shareholder returns.

The article Should You Buy Capita Today? originally appeared on

Royston Wild does not own shares in Capita, and neither does The Motley Fool.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.