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 Associated British Foods
Sweet performance
ABF's mixture of food and textiles has performed strongly against the FTSE 100 over the last 10 years, as these figures show:
|
Total Returns |
2007 |
2008 |
2009 |
2010 |
2011 |
10-Yr. Trailing Avg. |
|---|---|---|---|---|---|---|
|
ABF |
11.3% |
(16.6%) |
15.5% |
46.6% |
(4.2%) |
10.5% |
|
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.)
ABF's 10-year trailing average return has left long-term shareholders substantially ahead of the FTSE 100, and it's worth noting that the company has hammered the index so far this year, with a total return of 25.9% against the 7.3% provided 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 ABF shapes up:
|
Item |
Value |
|---|---|
|
Year founded |
1935 |
|
Market cap |
11.0 billion pounds |
|
Net debt |
1.3 billion pounds |
|
Dividend Yield |
1.8% |
|
5-Year Average Financials |
|
|
Operating margin |
7.5% |
|
Interest cover |
9.2 times |
|
EPS growth |
7.8% |
|
Dividend growth |
5.8% |
|
Dividend cover |
2.8 times |
Sources: Morningstar, Digital Look, Associated British Foods.
Here's how I've scored ABF on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
|
Longevity |
Approaching its first century. |
4/5 |
|
Performance vs. FTSE |
Strong outperformance. |
4/5 |
|
Financial strength |
Low gearing and stable margins. |
4/5 |
|
EPS growth |
A big leap in 2010 helped raise the average. |
4/5 |
|
Dividend growth |
Strong and consistent. |
4/5 |
|
Total: 20/25 |
In addition to ever-popular clothes retailer Primark, ABF has a big food business that includes consumer brands -- such as Twinings, Silver Spoon, and Ovaltine -- as well as a large wholesale ingredients business, built around its sugar empire.
It's a diverse mixture that seems to work well and has made the stock extremely popular with City investors, who have propelled the company's share price up 25% so far this year. Analysts are forecasting a 25% increase in pre-tax profits when ABF releases its full-year results on Nov. 6, so if these expectations are fulfilled, a further boost is likely to the share price.
The problem with all of this success is that ABF's price-to-earnings ratio is currently a heady 18.7, with a forecast P/E based on this year's expected earnings of 16.1. While not outrageously expensive, it isn't cheap, either, and ABF's cautious dividend payout approach means the shares yield a meager 1.8%.
On the other hand, ABF has increased its dividend continuously since at least 1993 (the oldest figures I could find) and this reliable dividend growth means that over time, income from ABF shares is likely to continue to grow and keep pace with inflation -- a desirable attribute for a retirement share.
ABF's score of 20/25 is well deserved, and while I don't think I would buy ABF shares at their current price, any temporary weakness would definitely make an excellent buying opportunity for a long-term investment.
Expert selections
Doing your own research is important, but another good way of identifying great retirement 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:
