Is EVRAZ 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 EVRAZ  (LSE: EVR  ) (NASDAQOTH: EVRZF  ) , a Russian mining company and steel producer with operations in Eastern Europe, South Africa, the United States and Canada.

EVRAZ vs. FTSE 100
EVRAZ only joined the FTSE 100 in December 2011, but has it made a promising start?

Total Returns

Nov.-Dec.
2011

2012

2013
YTD

1-Year
Trailing Avg.

EVRAZ

5.6%

(28.3%)

(40.1%)

(55.4%)

FTSE 100

(6%)

10%

10.5%

16.4%

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.

EVRAZ's performance to date has not been inspiring and the firm's share price has been affected both by last year's general slowdown in the global steel market, and by a disappointing set of results earlier this month.

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 EVRAZ shapes up:

Item

Value

Year founded

1992

Market cap

£2.1bn

Net debt

$6.2bn

Dividend Yield

4.5%*

2012 financials

Operating margin

1.7%

Interest cover

1.4x

Earnings per share (adjusted)

1.9p

Dividend

7.0p

Dividend cover

0.3x

*EVRAZ cancelled its full-year dividend for 2012, this yield is based on the 2012 interim payout. Future dividend prospects are unknown.

As the figures above suggest, EVRAZ had a bad year in 2012 and was forced to cancel its full-year dividend payout "to preserve the financial standing of the Company", according to the final results. EVRAZ did manage to reduce its net debt by 4% last year, but at more than $6 billion, this remains a substantial burden on the company.

The combination of a cancelled dividend and a hefty debt burden means that there's no way I would purchase EVRAZ as a retirement share, but let's see how it scores against my standard criteria:

Criteria

Comment

Score

Longevity

Twenty years isn't long enough.

2/5

Performance vs. FTSE

Its share price is down 40% so far this year.

1/5

Financial strength

A costly $6 billion debt pile could become a problem.

2/5

EPS growth

Reported losses for two of the last four years.

1/5

Dividend growth

A very patchy record.

2/5

Total: 8/25

It's worth noting that EVRAZ did make an operating profit of $243 million last year, but interest costs of $645 million ensured that this didn't translate to a pre-tax profit. EVRAZ's annual interest costs appear to be around 10% of its net debt, which means that although it did have cash and cash equivalents of $1.3 billion at the end of 2012, this may not be enough if the steel market fails to pick up.

My verdict
It's clear that EVRAZ cannot possibly be a contender for an income-focused retirement portfolio. Although it has paid some quite attractive dividends at times in the past, they have been very inconsistent. The company's decision to cancel last year's full-year dividend was prudent but highlights its weak financial situation -- definitely not ideal for a retirement share.

The best FTSE 100 dividends?
Not all natural resource shares are as risky as EVRAZ, but I have to admit that no mining companies made it into The Motley Fool's latest special report, "5 Shares to Retire on".

The Fool's in-house experts recently crunched the numbers on every company in the FTSE 100 and identified five of the best blue chip dividend shares in the UK. I believe that this should be essential reading for anyone aiming to build a diversified, income portfolio for their retirement.

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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