Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is London Stock Exchange 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 newly promoted FTSE 100 member London Stock Exchange Group  (LSE: LSE  ) (NASDAQOTH: LDNXF  ) , the company that operates the Main Market and the Alternative Investment Market (AIM) in London, as well as the Mercato Telematico Azionario (MTA) -- the main Italian stock market.

LSE Group vs. FTSE 100
Let's start with a look at how the London Stock Exchange Group has performed as a company against the FTSE 100 over the last 10 years:

Total Returns 2008 2009 2010 2011 2012 10-Yr. Trailing Average
LSE Group -73% 45.6% 20.2% -1.9% 40.5% 17.3%
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.)

Unsurprisingly, London Stock Exchange Group fared very badly in 2008, during the onset of the financial crisis. However, it has recovered strongly since and has outperformed the FTSE 100 by an average of 8.1% per year since 2003.

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 London Stock Exchange shapes up:

Item Value
Year founded 2007*
Market cap 3.6 billion pounds
Net debt 481.7 million pounds
Dividend Yield 2.2%
5-Year Average Financials
Operating margin 35.7%
Interest cover 7.4x
EPS growth 31%
Dividend growth 9.5%
Dividend cover 1.7x

* London Stock Exchange Group was formed in 2007 through a merger of the Borsa Italiana and London Stock Exchange.

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

Criteria Comment Score
Longevity The LSE and Borsa Italiana have 200-year-plus histories. 4/5
Performance vs. FTSE Very strong. 4/5
Financial strength Low debt, high margins, and good cash flow. 4/5
EPS growth The last couple of years have seen a strong recovery. 4/5
Dividend growth The payout is up 40% on five years ago. 4/5
Total: 20/25

In many ways, the London Stock Exchange Group is a data and software company. Financial markets are heavily computerized, and investors depend on software systems for both financial data and executing transactions. In the first half of last year, 42% of LSE Group's revenue came from its Information Services division, which provides real-time data to investment professionals trading London and Italian-listed companies. This business delivered a 49% operating margin last year, while LSE Group's other main income source, its Capital Markets operations (the London and Italian stock markets), delivered a 44% operating margin and 37% of revenues.

LSE Group's high profit margins are due in part to the near-monopoly conditions it enjoys in some areas of its business, where would-be competitors face high barriers to entry. As a result of these high margins, the firm generates a lot of cash -- LSE's free cash flow is usually more than 80% of operating cash flow, enabling it to fund small acquisitions and investments without needing extra debt.

My verdict
Although LSE Group's business is dependent on subscriptions and trading fees, I think that its high margins and lack of direct competition mean that it should be able to afford to absorb periodic downturns without becoming unprofitable. However, the company's shares have risen by 21% so far in 2013 and currently look quite expensive, with a forward price-to-earnings ratio of around 14 and dividend yield of just 2.2%.

If you believe that London's financial markets will continue to be among the biggest and most important in the world, then I think that LSE Group could make a good retirement share, thanks to its very strong cash flow and highly defensible business model -- but now may not be the best time to buy.

2013's top income stock?
Investing in the financial sector still carries some additional risk and may not suit all investors. A potentially safer alternative is the U.K. utility sector -- and The Motley Fool's team of expert 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: 2335477, ~/Articles/ArticleHandler.aspx, 9/26/2016 5:12:05 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 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

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 4:55 AM
LSE $2787.00 Down -42.00 -1.48%
London Stock Excha… CAPS Rating: No stars