LONDON -- The last five years have been tough for those in retirement. Portfolio valuations have been hammered, and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the U.K. economy look set to muddle through at best for some years to come.
A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.
In this series, I'm tracking down the U.K. large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).
Today, I'm going to take a look at Experian
Experian vs. FTSE 100
Let's start with a look at how Experian has performed against the FTSE 100 over the last five years. Experian was only floated as an independent business in 2006, so 10-year figures aren't available:
|
Total Returns |
2007 |
2008 |
2009 |
2010 |
2011 |
5-Year Trailing Avg. |
|---|---|---|---|---|---|---|
| Experian |
-31.3% |
10.6% |
45.5% |
32.2% |
11.7% |
18.5% |
| FTSE 100 |
7.4% |
-28.3% |
27.3% |
12.6% |
-2.2% |
1.5% |
Source: Morningstar. (Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)
Despite the initial impact of the financial crisis, Experian has strongly outperformed the FTSE 100 over the last five years, helped perhaps by the renewed attention businesses have paid to monitoring the creditworthiness of their customers. The trend looks set to continue this year as Experian has delivered a total return of 23.8% so far in 2012, against 7.3% for the FTSE 100.
What's the score?
To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how Experian shapes up:
|
Item |
Value |
|---|---|
| Year founded |
1996 |
| Market cap |
10.4 billion pounds |
| Net debt |
1.2 billion pounds |
| Dividend Yield |
1.9% |
|
5-Year Avg. Financials |
|
| Operating margin |
18.3% |
| Interest cover |
8.1x |
| EPS growth |
14.7% |
| Dividend growth |
13.6% |
| Dividend cover |
2.8x |
Source: Morningstar, Digital Look, Experian.
Here's how I've scored Experian on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
| Longevity | Experian is still a young business. |
3/5 |
| Performance vs. FTSE | Consistent outperformance for nearly five years. |
5/5 |
| Financial strength | Experian's high and consistent profits outweigh its debt. |
4/5 |
| EPS growth | Earnings growth has been strong since its flotation. |
4/5 |
| Dividend growth | Very attractive dividend growth, although a slightly low yield. |
4/5 |
|
Total: 20/25 |
Experian's score of 20/25 is impressive and reflects the company's consistent outperformance over the last five years. As a consequence, its shares are permanently in demand and trade on a fairly high price to earnings (P/E) ratio of 21, with a forecast P/E of 20. This results in a dividend yield of just 1.9%, which is low compared to the 3.3% yield you could get from a FTSE 100 tracker.
On the other hand, Experian has high operating margins and continues to expand strongly across the globe. It also offers a range of services in addition to credit checking, enabling it to develop a deeper and more profitable relationship with its customers. In the company's most recent half-yearly results, it reported double-digit revenue growth in Latin America and delivered a 5% increase in its interim dividend.
In conclusion, I believe Experian's long-term business model is sound. Its policy of selective acquisitions has helped increase its market share in a number of global markets, and it's a big player on both sides of the Atlantic. Experian's shares are currently quite expensive but have the potential to be good retirement shares, and should benefit from a rising dividend yield over time, making them a more appropriate purchase if your retirement is still some way in the future.
Top income picks
Doing your own research is important, but another good way of identifying great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to 31 December 2011.
The good news is that you can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Woodford's choices look like excellent retirement shares to me, and the report explains how he chose some of his biggest holdings.
This report is completely free and I strongly recommend you click here to download "8 Shares Held by Britain's Super Investor" today, as it is available for a limited time only.
