Is easyJet the Ultimate Retirement Share?

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 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 one of the FTSE 100's newest members, easyJet  (LSE: EZJ  ) (NASDAQOTH: ESYJY  ) , the budget airline founded by Sir Stelios Haji-Ioannou that was promoted to the FTSE 100 in its most recent reshuffle.

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

Total Returns

2008

2009

2010

2011

2012

10-year trailing avg.

easyJet

(54.3%)

26.0%

24.7%

(10.7%)

89.5%

16.3%

FTSE 100

(28.3%)

27.3%

12.6%

(2.2%)

10.0%

9.4%

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.

easyJet's returns have tended to be more exaggerated than those of the big cap index. This is unsurprising for a smaller company that depends heavily on economic sentiment and is vulnerable to swings in fuel costs and taxation. Last year's exceptional 89.5% total return was boosted by a 108% increase in the company's dividend, and helped propel easyJet into 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 easyJet shapes up:

Item

Value

Year founded

1995

Market cap

£4.2bn

Net debt

£74m

Dividend Yield

2.4%

5-year average financials

Operating margin

6%

Interest cover

8.2x

EPS growth

11.7%

Dividend growth

n/a

Dividend cover

3.9x

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

Criteria

Comment

Score

Longevity

easyJet has not yet celebrated its 20th birthday.

2/5

Performance vs. FTSE

Very strong, but can it sustain its profitable growth?

4/5

Financial strength

Profitable, but cash flow is stretched.

3/5

EPS growth

Earnings have recovered well since 2009.

4/5

Dividend growth

Too early to say, after just two years of payouts.

3/5

Total: 16/25

Budget airline easyJet was pioneered the no-frills, low-cost approach to air travel and it has been hugely successful, expanding from a standing start in 1995 to a European network operating 600 routes across 30 countries today. easyJet has been profitable, too, and has managed its expansion without incurring excessive levels of debt. So what's its secret?

To minimize its borrowing requirements and preserve its cash, easyJet has leveraged its aircraft fleet to fund future growth. A look at easyJet's recent cash flow statements shows that it has raised £500 million over the last three years through the sale and leaseback of its aircraft and from finance leases, where assets are effectively mortgaged and then repurchased over a period of years. It has used this money to support capital expenditure and dividend payments that aren't covered by free cash flow.

My verdict
There's no doubt that easyJet is a success story, but I'm less convinced about its suitability as a retirement share. For me, the company's youth would disqualify it as a retirement share anyway, but in easyJet's case, I'm also worried about the twin pressures of the cost of growth and the cost of its dividend.

Despite a respectable score of 16/25, easyJet is not a share I'd add to my retirement portfolio, as I prefer companies with proven dividend histories and stronger cash flow -- such as those I mention below.

5 dividends to retire on
The key to successful retirement investing is owning shares in companies that pay reliable, rising dividends that are supported by strong cash flow. The Motley Fool's team of analysts have crunched the numbers and identified five of the best blue chip dividend payers in the UK.

I believe that the team's report -- "5 Shares to Retire on" -- should be essential reading for anyone aiming to build a diversified, income portfolio for their retirement.

This new report suggests high-quality income opportunities in five different sectors, so if you would like to know more, click here now to download your copy of this report -- it's free, but availability is strictly limited, so don't delay.

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