Is Vodafone 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 mobile telecoms giant Vodafone Group (LSE: VOD.L  ) , whose global expansion has made it the third-largest company in the FTSE 100.

It's good to talk
Vodafone has comprehensively outperformed the FTSE 100 in recent years, as these figures show:

Total Returns

2007

2008

2009

2010

2011

Trailing 10-Year Avg.

Vodafone 37.6% -21.9% 9.0% 21.3% 15.8% 9.6%
FTSE 100 7.4% -28.3% 27.3% 12.6% -2.2% 7.6%

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.)

Vodafone's trailing 10-year average total return is significantly higher than that of the FTSE 100, and the global scale of its business -- it employees 86,000 people across 30 countries -- has helped insulate it from regional downturns. It also generates impressive quantities of free cash, helped in part by the dividends it receives from its 45% share of U.S. mobile company Verizon Wireless. As a result, Vodafone has become a great dividend payer and forms a large part of many income portfolios, including mine.

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 Vodafone shapes up:

Item

Value

Year founded 1984
Market cap 88 billion pounds
Net debt 26 billion pounds
Dividend Yield 5.4%
5-year average financials
Operating margin 17.3%
Interest cover 7.5 times
EPS growth 22.2%
Dividend growth 7.9%
Dividend cover 2.1 times

Source: Morningstar, Digital Look, Vodafone Group.

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

Criteria

Comment

Score

Longevity Vodafone isn't that old, but there's no doubting the future prospects for mobile telecoms. 4/5
Performance vs. FTSE Vodafone has a history of outperforming the leading index. 5/5
Financial strength Expansion has been fueled by a fair amount of debt, but interest is well covered and cash flow is now positive. 3/5
EPS growth Earnings per share have been volatile but look to be stabilizing. 3/5
Dividend growth Large, consistent and inflation-beating, Vodafone's dividends are desirable. The main risk is that Verizon will cut its dividends. 4/5

Total: 19/25

Mobile telecom networks are rapidly becoming part of the core infrastructure of most countries, and I believe that Vodafone will remain one of the world leaders in this industry. Its score of 19/25 reflects its strong attractions and I believe that Vodafone could make an excellent contribution to a retirement fund portfolio over the next couple of decades.

Far better minds than mine think the same way, too -- Vodafone is one of the eight largest holdings of City fund manager Neil Woodford, whose stock picks have outperformed the wider index by a staggering 305% over the last 15 years.

The U.K.'s best investor?
Neil Woodford's dividend investing style is well-suited to a retirement portfolio and has proved remarkably successful, outperforming many more aggressive growth funds over the last 15 years.

If you'd like to learn more about Neil Woodford's stock choices without investing in his funds, then you can find details of his eight biggest holdings in this free Motley Fool report. The report explains how he chose some of his biggest holdings and discusses his investment approach, which helped him avoid bank shares before the crash and has led to him managing £20bn of private investors' money -- more than any other City manager.

This report is completely free and I strongly recommend you download"8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

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Further investment opportunities

Roland owns shares in Vodafone. The Motley Fool has a disclosure policy.
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