Is John Wood Group 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 John Wood Group (LSE: WG  ) , a global oil, gas and power services group that employs around 43,000 people in 50 countries.

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

Total Returns

2008

2009

2010

2011

2012

2013 YTD

10 yr trailing avg

John Wood Group

(55.6%)

67.3%

83.1%

(9.6%)

14.9%

19.3%

15.5%

FTSE 100

(28.3%)

27.3%

12.6%

(2.2%)

10%

9.9%

8.8%

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.

Wood Group's strong 10-year average total return is reassuring and its dividend payments have also risen steadily in recent years, but the company is vulnerable to shifts in the price of oil and gas and has quite volatile profits -- so is it a potential 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 Wood Group shapes up:

Item

Value

Year founded

1912

Market cap

£3.0bn

Net debt

$154.5m

Dividend Yield

1.7%

5 year average financials

 

Operating margin

5%

Interest cover

17.6x

EPS growth

9.1%

Dividend growth

13.6%

Dividend cover

13.7x

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

Criteria

Comment

Score

Longevity

The company has adapted and survived for over 100 years.

5/5

Performance vs. FTSE

Wood Group has beaten the FTSE for over 6 years.

4/5

Financial strength

Moderate debt levels but fairly tight margins.

4/5

EPS growth

Upward trend, but earnings have been volatile.

3/5

Dividend growth

Solid growth since 2005.

3/5

Total: 19/25

   

Wood Group has grown strongly over the last five years and shareholder returns were boosted in 2011 by a £1.1 billion return of cash, following the sale of the company's Well Support division to GE. The scheme was executed through a tender offer, rather than a special dividend, but shareholders participating in the scheme will have seen a substantial cash return in addition to their regular dividend payments.

However, despite a 5-year average dividend growth rate of 13.6%, Wood Group's forecast dividend yield of 1.7% is far lower than that of its sector peers Amec, which offers a prospective yield of 4.1%, and Petrofac, which offers a potential 3.6% yield. All three companies trade on similar forward price to earnings (P/E) ratios and are of a similar size, making Wood Group less attractive as a potential retirement share, despite its strong performance history.

My verdict
Wood Group is a high quality company with a strong track record of profitable growth. However, as a retirement share, it would provide a dividend income substantially below its sector average, making it look relatively expensive compared to Amec and Petrofac, its two main U.K.-listed peers. Both of these companies also have net cash positions, which compare favourably to Wood Group's $154 million net debt.

Finally, if you're interested in investing in an oil services company as part of a diversified retirement portfolio, you should remember that these companies would be vulnerable to a sustained drop in oil prices, so their performance is likely to be correlated with that of oil supermajors such as Royal Dutch Shell and BP.

2013's top income stock?
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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.

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