Is Hammerson 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 to protect 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 property firm Hammerson  (LSE: HMSO  ) , which owns a 5.5 billion-pound portfolio of shopping centres and retail parks in France and the U.K..

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

Total Returns 2008 2009 2010 2011 2012 10-Yr. Trailing Average
Hammerson -43.8% -15.2% 1.9% -10.6% 39.4% 5.6%
FTSE 100 -28.3% 27.3% 12.6% -2.2% 10% 9.2%

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.)

Hammerson's 10-year average trailing total return trails behind that of the FTSE 100, suggesting it has underperformed the index -- but with a real estate investment trust (REIT) such as this, the main attraction is income. I'll take a look at Hammerson's income credentials later in this article.

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 Hammerson shapes up:

Item Value
Year founded 1942
Market cap 3.5 billion pounds
Net debt 2.0 billion pounds
Dividend Yield 3.7%
5-Year Average Financials
Operating margin -26.1%
Interest cover 1.7x
EPS growth -11.9%
Dividend growth -0.9%
Dividend cover 1.1x

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

Criteria Comment Score
Longevity 71 years isn't bad. 4/5
Performance vs. FTSE Slightly below average. 2/5
Financial strength Gearing has dropped steadily since 2008 and returns have improved. 4/5
EPS growth Inconsistent. 3/5
Dividend growth A strong record was ruined when the markets crashed in 2008. 3/5
Total: 16/25

In the U.K., REITs such as Hammerson are exempt from corporation tax on their profits and from capital gains on the sale of their rental properties. In return for this benefit, they are required to distribute 90% of their taxable income to shareholders as dividends. All of this means that the share price of a REIT is usually influenced by the book value per share of the firm's property and by its dividend yield, which is linked to its rental income.

Hammerson currently trades at around 89% of its book value, compared to 95% for its retail REIT peer Intu Properties (Intu was formerly known as Capital Shopping Centres). Hammerson's 3.7% yield is much lower than Intu's 4.6% payout, but Intu is much more highly geared than Hammerson, and I would choose Hammerson for the greater safety offered by its lower gearing.

Hammerson's sole focus on retail properties has enabled it to build a diverse portfolio of urban shopping centers and out-of-town retail parks, but it has still struggled to grow profits in the face of various High Street bankruptcies and flat consumer spending. However, Hammerson has several major projects in development, and like many companies, it is benefiting from refinancing its bonds at lower rates, all of which should help sustain earnings growth over the next few years.

My verdict
For anyone building a retirement portfolio focused on income, I think that a REIT such as Hammerson is a worthwhile addition. Although the retail industry in the U.K. and France is going through a tough period at the moment, in the long term, I think that large-scale ownership of retail properties should provide a dividend income that keeps pace with inflation.

Hammerson's current 3.7% dividend yield is above the FTSE 100 average of 3.1%, and I believe it could be a solid, long-term retirement share for anyone seeking exposure to the commercial property market.

2013's top income stock?
Like REITs, the utility sector is known for paying above-average dividends -- and The Motley Fool's team of analysts has identified one FTSE 100 utility share that it believes offers a particularly high-quality income opportunity.

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

Indeed, our 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.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2335307, ~/Articles/ArticleHandler.aspx, 9/27/2016 3:12:52 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 5 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 12:02 PM
HMSO $582.80 Down -2.70 +0.00%
Hammerson CAPS Rating: No stars