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 (UKX) 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 packaging company Rexam
Canned performance?
Let's start by taking a look at how Rexam has performed against the FTSE 100 over the last 10 years:
|
Total Returns |
2007 |
2008 |
2009 |
2010 |
2011 |
10-year-trailing average |
|---|---|---|---|---|---|---|
|
Rexam |
(16.7%) |
(11.3%) |
(13.7%) |
18.6% |
9.9% |
4.1% |
|
FTSE 100 |
7.4% |
(28.3%) |
27.3% |
12.6% |
(2.2%) |
7.5% |
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.)
Rexam's 10-year-average trailing total return is respectable but not outstanding, and the company has underperformed the FTSE 100 over the last decade. However, it has tightened its focus on its core beverage cans business and looks good value at present, trading at an attractive P/E of 12.8, well below the FTSE 100 average of 16.4. So could Rexam be a good 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 Rexam shapes up:
|
Item |
Value |
|---|---|
|
Year founded |
1881* |
|
Market cap |
£4.1bn |
|
Net debt |
£1.4bn |
|
Dividend Yield |
3.1% |
|
5-year-average financials |
|
|
Operating margin |
9.7% |
|
Interest cover |
3.5x |
|
EPS growth |
8.5% |
|
Dividend growth |
(2.8%) |
|
Dividend cover |
2.2x |
Source: Morningstar, Digital Look, Rexam. *Until 1995, Rexam was called Bowater and was a far more diverse business.
Here's how I've scored Rexam on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
|
Longevity |
A long history, albeit with several changes of direction. |
5/5 |
|
Performance vs. FTSE |
A slight underperformer. |
3/5 |
|
Financial strength |
Margins are rising strongly, but Rexam carries substantial debt |
4/5 |
|
EPS growth |
A reasonable recovery after a slump in 2008. |
3/5 |
|
Dividend growth |
Dividends are growing but remain below their 2008 peak. |
2/5 |
|
Total: 17/25 |
Rexam's core business is making beverage cans, and it produces 60 billion cans a year, primarily for markets in the U.S., Europe, and Latin America. Cans come in all shapes and sizes and Rexam's range of specialty cans -- such as the Red Bull can -- offers especially high margins and provides the company with a competitive advantage over some of its competitors. A steady series of acquisitions has broadened Rexam's grip on the can market and turned it into a major global player, and it reported a 6% rise in can volumes in the first half of this year.
Rexam remains focused on delivering growth, so it isn't an obvious choice as an income share for retirees. However, its score of 17/25 is respectable and it is a good quality business that currently looks quite cheap. I believe that as Rexam matures over the long term and focuses on efficiency above growth, it could become an attractive income share -- potentially ideal for anyone whose retirement is still some years away.
Top income picks
Doing your own research is important, but another good way of identifying 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.
The good news is that you can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.
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:
