Is Xstrata 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 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 Xstrata (LSE: XTA.L  ) , the big miner whose pending merger with Glencore International (LSE: GLEN.L  ) has kept it in the headlines in recent weeks. The merger may yet fall through, so is Xstrata an attractive retirement investment in its own right?

Up and down
Xstrata is generally well-regarded by investors, but as is common with mining shares, the company has delivered quite a varied performance against the FTSE 100 over the last 10 years:

Total Return

2007

2008

2009

2010

2011

Trailing 10-Year Average

Xstrata

40.1%

(81.2%)

75.2%

35%

(33.7%)

5.1%

FTSE 100

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

8.2%

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.

The 10-year average trailing total return suggests that Xstrata has the ability to perform strongly against the FTSE 100, but the volatility of recent years has prevented it from outperforming the index over the last decade.

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 Xstrata shapes up.

The basics:

Year Founded

2002

Market Cap

28.3 billion pounds

Net Debt

5.4 billion pounds

Dividend Yield

2.6%

Five-year average financials:

Operating Margin

24.4%

Interest Cover

18.7 times

EPS Growth

12.6%

Dividend Growth

40%

Dividend Cover

14.4 times

Source: Morningstar, Digital Look, Xstrata.

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

Criteria

Comment

Score (out of 5)

Longevity

Its origins as a mid-cap investment company date back to 1926, but it's a newcomer to the big league.

2

Performance vs. FTSE

Investors who bought shares in Xstrata's IPO could have quadrupled their money in 2008 -- but today the shares trade slightly below their IPO price.

3

Financial strength

Moderate gearing and attractive margins.

4

EPS growth

Decent growth and good prospects.

4

Dividend growth

Dividend growth has been flattered by its recovery from hefty cuts in 2008 and 2009.

2

 

 

Total: 15/25

A score of 15 out of 25 leaves Xstrata looking weak alongside some stronger candidates for a retirement portfolio, such as Rio Tinto and BHP Billiton. Despite this, Xstrata has been fairly successful during its short period on the LSE, and its merger with Glencore International, which looks likely to succeed, is generally considered by analysts to be a good deal that will enhance the prospects of both companies.

Many Xstrata shareholders remain angry about the deal, which they see as selling the company on the cheap, but shares in "Glenstrata" could be an attractive way to gain income-paying exposure to mining and commodities within a retirement portfolio, and Xstrata shares currently look good a value to me, regardless of the merger outcome.

Expert selections
Doing your own research is important, but another good 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, whose dividend stock picks outperformed the wider index by a staggering 305% in the 15 years to the end of 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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Further investment opportunities:

Roland owns shares in Rio Tinto but does not own any of the other shares mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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