Is Aggreko 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 Aggreko (LSE: AGK.L  ) , a leading supplier of temporary-power generation equipment whose share price dropped 8% recently after it downgraded its profit expectations for this year.

Electrifying performance
Aggreko has grown strongly over the last decade, outperforming the FTSE 100 by a massive margin:

Total Returns

2007

2008

2009

2010

2011

10-Year Trailing Average

Aggreko

24%

(14.7%)

111%

60.9%

33.2%

34.1%

FTSE 100

7.4%

(28.3%)

27.3%

12.6%

(2.2%)

7.3%

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.)

Aggreko's 10-year trailing average return is nearly five times that of the FTSE 100, but growth has slowed this year, and the company's returns so far are roughly level with those of 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 Aggreko shapes up:

The basics

Year Founded

1962

Market Cap

5.8 billion pounds

Net Debt

364 million pounds

Dividend Yield

1%

Five-year average financials

Operating Margin

22.9%

Interest Cover

16.7 times

EPS Growth

38.2%

Dividend Growth

24.9%

Dividend Cover

4.9 times

Source: Morningstar; Digital Look; Aggreko.

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

Criterion

Comment

Score (out of 5)

Longevity

Still a relative youngster.

3

Performance vs. FTSE

Outstanding.

5

Financial strength

High margins, moderate debt, and generous interest cover.

4

EPS growth

Very strong.

5

Dividend growth

Strong growth but low payout ratio means yields will remain low.

3

 

 

Total: 20/25

A high score of 20 out of 25 reflects Aggreko's strong recent growth, but this could be changing. Profits from Aggreko's Local business -- which provides temporary power to one-off events such as the 2012 Olympics -- have been dwarfed in recent years by profits from its International Power Projects division. This operation has boomed as fast-growing emerging economies with decrepit infrastructure have needed fast, reliable supplies of extra electricity. While that need hasn't gone away, this division's powerful growth phase appears to tapering off.

The market lopped 8% from Aggreko's share price in October following a trading update in which the firm forecast a 2.5% decline in profit this year, thanks to some unusually high delivery costs (taking the generators into remote locations) and an increase in bad debts. A few days later, Aggreko's smaller peer, APR Energy, issued a profit warning that showed a shrinking order book and a series of delayed contracts.

When two competing companies both issue profit warnings at the same time, a slowdown in the wider sector seems likely. I remain confident in Aggreko's future prospects, but I certainly would not buy shares in the company for my retirement portfolio at present; I suspect they may have further to fall and, in any case, remain too expensive and generate too little income, thanks to their forecast P/E of 21 and forward yield of 1.1%. There are much better income opportunities elsewhere.

Top income picks
Aggreko may not be the right choice for an income-driven portfolio, but there are plenty of attractive alternatives in the FTSE 100 that could make good retirement shares, and you can discover some of these by studying 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 does not own shares in any of the companies 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.


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