Is Croda International 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 Croda International  (LSE: CRDA  ) (NASDAQOTH: COIHY  ) , the chemical business that makes everything from industrial lubricants to skincare products.

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

Total Returns

2008

2009

2010

2011

2012

10-year trailing avg

Croda International

(7.7%)

57.9%

105.1%

14.7%

34.9%

29.5%

FTSE 100

(28.3%)

27.3%

12.6%

(2.2%)

10%

9.3%

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.

Croda's strong growth over the last five years has seen it outperform the FTSE 100 by a factor of three. The speciality chemicals firm was promoted into the FTSE 100 in March 2012, highlighting the substantial growth opportunities that can be available among FTSE 250 companies. FTSE 100 membership means that Croda is now widely owned by pension funds and index trackers -- so will it make 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 Croda shapes up:

Item

Value

Year founded

1925

Market cap

£3.8bn

Net debt

£207.7m

Dividend Yield

2.2%

5-year average financials

Operating margin

18.9%

Interest cover

151x

EPS growth

34.9%

Dividend growth

30.5%

Dividend cover

2.8x

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

Criteria

Comment

Score

Longevity

Croda will be planning a centenary party soon.

4/5

Performance vs. FTSE

Very strong growth over the last decade.

5/5

Financial strength

Minimal debt and strong margins.

4/5

EPS growth

Impressive earnings growth, although it slipped last year.

4/5

Dividend growth

The dividend has grown with earnings.

5/5

Total: 22/25

Croda International has provided investors with a textbook example of successful growth over the last five years, thanks to a combination of organic growth and well-judged acquisitions. These impressive levels of growth are likely to tail off as the company gets bigger, but it remains well positioned for further expansion, thanks mainly to rising demand for its proprietary skin care products, which are widely used in cosmetics.

Croda's consumer care division accounted for 56% of sales last year and around 73% of operating profit. The firm is accelerating its investment in Latin American markets, and CEO Steve Foots said last year that Croda was benefiting from the increased use of cosmetic and skin care products by people of all ages and both genders -- a trend that seems likely to continue.

My verdict
Unsurprisingly, this long-running success has made Croda quite an expensive share. Its current share price of around 2,800 pence gives a forecast price to earnings ratio (P/E) of about 20, and a forecast dividend yield of 2.35%. Both of these are less attractive than the FTSE 100 as a whole, which offers a forecast P/E of around 16 and a forward dividend yield of about 3.2%. However, Croda's dividend has risen every year since at least 1993, giving it an attractive record of rising income.

Despite its costly price tag, I believe that Croda's growing markets and reliable dividend growth record could make it a very attractive retirement share, although I might choose to drip feed money into the stock, rather than making a large lump sum purchase, in order to capitalize on any future weakness in the firm's share price.

5 dividends to retire on
Croda's dividend growth record is impressive, and I believe 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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