Is GKN the Ultimate Retirement Share?

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 UK 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 UK large-caps that have the potential to beat the FTSE 100 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 automotive and aviation engineering group GKN  (LSE: GKN  ) (NASDAQOTH: GKNLY  ) .

GKN vs. FTSE 100
Let's start with a look at how GKN has performed against the FTSE 100 over the last 10 years:

Total Returns 2008 2009 2010 2011 2012 10 yr trailing avg
GKN -62.3% 20.6% 91.2% -15.2% 28.5% 8.2%
FTSE 100 -28.3% 27.3% 12.6% -2.2% 10% 10.5%

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.

GKN's 10-year average trailing total return shows that over the last decade, its performance has lagged behind that of the FTSE 100 slightly, but not necessarily enough to prevent it being a good retirement share.

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 GKN shapes up:

Item Value
Year founded 1900
Market cap £4.6bn
Net debt £871m
Dividend Yield 2.6%
5 year average financials
Operating margin 5.2%
Interest cover 6.1x
EPS growth 9.9%
Dividend growth -4.6%
Dividend cover 4.0x

Here's how I've scored GKN on each of these criteria:

Criteria Comment Score
Longevity It's been around for more than a century. 5/5
Performance vs. FTSE Fair to middling. 3/5
Financial strength Good at present, but inconsistent historically. 3/5
EPS growth Recent performance has been good. 3/5
Dividend growth Cuts feature too heavily in GKN's dividend history. 2/5
Total: 16/25

One of the key attributes of a retirement share is a reliable, consistent dividend history, with increases that are broadly in line with inflation. After all, you may need this income for decades. Achieving this ideal isn't always possible, but I'm pretty certain that you should be able to find a better source of income than GKN, which has made major cuts to its dividend twice in the last twelve years, in 2001/2 and 2008/9. GKN's current dividend remains lower than it was before both of these sets of cuts.

On the other hand, GKN seems to have reinvented and improved itself since 2008. Its financial strength has improved, debt has been paid down, dividend and interest cover has risen, and last year's acquisition of Volvo Aero -- which makes jet engine components -- is widely seen as a smart move that will help the firm grow both its market share and its earnings. The firm's operating margin has also improved, rising to 9.6% last year, and it currently trades on an undemanding price to earnings ratio (P/E) of 10.5 -- well below both the FTSE 100 average and that of its highly rated peer, Rolls-Royce Holdings, which has a P/E of 15.7.

My verdict
GKN is a far more attractive business than it used to be and its acquisition of Volvo Aero has strengthened its position in the aerospace components market, protecting it from weaker automotive component sales in Europe. Its near-term prospects look good, but it has a chequered history that has left long-term shareholders with a falling income -- 2012's 7.2p dividend was half the 14.9p payout of 2001.

I wouldn't choose GKN for my retirement portfolio, as I believe there are far more reliable dividend prospects elsewhere in the FTSE 100, including the company I mention below.

2013's top income stock?
The utility sector is known for its reliable, above-average dividends, but the Motley Fool's team of analysts has identified one FTSE 100 utility share that they believe offers a particularly high-quality income opportunity.

The company in question offers a 5.7% dividend yield and the Fool's analysts believe that it could be worth up to 850p per share -- offering new investors a potential 20% gain on the current share price of around 700p.

Indeed, the Motley Fool's analysts are so confident in this share that they've named their report "The Motley Fool's Top Income Stock For 2013"! This exclusive new report is completely free, but will only be available for a limited time -- so click here to download your copy now.

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