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 things will improve 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 to build 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 WPP (LSE: WPP.L ) (Nasdaq: WPPGY ) , the FTSE 100 advertising and marketing giant that was founded by Martin Sorrell in 1985. Famous advertising names such as J Walter Thompson, Ogilvy, and Young & Rubicam have since been absorbed into the WPP empire, and the company now has operations in 108 countries.
Marketing gains?
Although WPP has delivered substantial share-price and dividend growth to shareholders, it has not managed to consistently beat the FTSE 100 over the last 10 years:
|
Total Return
|
2007
|
2008
|
2009
|
2010
|
2011
|
Trailing 10-Year Average
|
|
WPP Total Return
|
(6.3%)
|
(37.8%)
|
55.3%
|
32%
|
(12.3%)
|
6.5%
|
|
FTSE 100 Total Return
|
7.4%
|
(28.3%)
|
27.3%
|
12.6%
|
(2.2%)
|
6.9%
|
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.
WPP's trailing 10 year average total return of 6.5% means that despite impressive headline figures in some years, the total return for investors owning WPP shares over the last 10 years has been marginally less than the 6.9% delivered by the FTSE 100.
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 WPP shapes up:
The basics
|
Year Founded
|
1985
|
|
Market Cap
|
10 billion pounds
|
|
Net Debt
|
2.5 billion pounds
|
|
Dividend Yield
|
3%
|
Five-year average financials
|
Operating Margin
|
11.6%
|
|
Interest Cover
|
4.4 times
|
|
EPS Growth
|
14.3%
|
|
Dividend Growth
|
14.4%
|
|
Dividend Cover
|
3.2 times
|
Source: Morningstar, Digital Look, WPP.
Here's how I've scored WPP on each of these criteria:
|
Criterion
|
Comment
|
Score (out of 5)
|
|
Longevity
|
It's still a youngster, but it operates in a mature sector.
|
3
|
|
Performance vs. FTSE
|
Pretty average.
|
3
|
|
Financial strength
|
Customers are demanding better value, but the fundamentals seem OK.
|
4
|
|
EPS growth
|
Admirable EPS growth has been helped by many acquisitions.
|
4
|
|
Dividend growth
|
Dividend growth has matched EPS growth.
|
4
|
|
|
|
Total: 18/25
|
In 2010, WPP announced that it was targeting a 40% payout ratio for future dividends and has so far been true to its word, increasing its latest interim dividend by 18% against an adjusted EPS growth rate of 13%. A score of 18 out of 25 is respectable, and WPP's dividend policy makes it an attractive candidate for a retirement fund portfolio, especially if you believe the company is likely to maintain earnings growth at or above inflation levels.
Expert selections
One way to identify great dividend-paying shares is to study the choices of successful professional investors. One of the most successful income investors currently working in the City is fund manager Neil Woodford, who manages more money for private investors than any other City manager. Neil Woodford's dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to Dec. 31, 2011. You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. 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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