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 UK 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 UK 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 Intertek Group (ITRK 0.53%) (IKTS.F -3.22%), a company involved in industrial testing and certification on a global scale. Although it may not be a company that has crossed your investing radar before, Intertek has delivered impressive results to investors over the last ten years, and may deserve a closer look.
Intertek vs. FTSE 100
Let's start with a look at how Intertek has performed against the FTSE 100 over the last 10 years:
| Total Returns | 2008 | 2009 | 2010 | 2011 | 2012 | 10 yr trailing avg |
|---|---|---|---|---|---|---|
| Intertek | (18.9%) | 62.9% | 43.6% | 16.3% | 54.1% | 26.1% |
| FTSE 100 | (28.3%) | 27.3% | 12.6% | (2.2%) | 10% | 9.6% |
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.
Intertek's performance against the FTSE 100 has been deeply impressive over the last ten years. In each of the last five years individually, it has delivered total returns above those of the index, and Intertek's 10-year average total return of 26.1% is 2.7 times that of the FTSE 100.
If we exclude dividends and look at its share price alone, Intertek has also outperformed. The firm's share price has risen by 890% over the last ten years, compared to a 77% gain for 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 Intertek shapes up:
| Item | Value |
|---|---|
| Year founded | 1987* |
| Market cap | £5.4bn |
| Net debt | £618.5m |
| Dividend Yield | 1.1% |
| 5 year average financials | |
| Operating margin | 14.5% |
| Interest cover | 12.2x |
| EPS growth | 16% |
| Dividend growth | 17.9% |
| Dividend cover | 3.3x |
*Intertek's various components date back as long ago as 1880 but were only organised as a single business unit from 1987.
Here's how I've scored Intertek on each of these criteria:
| Criteria | Comment | Score |
|---|---|---|
| Longevity | Intertek's component parts are much older than its corporate structure, which only dates from 1996. | 3/5 |
| Performance vs. FTSE | Total returns 2.7 times the FTSE over the last ten years. | 5/5 |
| Financial strength | Consistent strong margins and plenty of free cash flow. | 4/5 |
| EPS growth | Earnings per share have risen by 150% over the last six years. | 5/5 |
| Dividend growth | Very strong and covered by free cash flow, but low yield. | 4/5 |
| Total: 21/25 | ||
Intertek Group was created when Inchcape's testing services division was sold in a management buyout in 1987. The company was floated in 2002 and moved into the FTSE 100 in 2009. Many of the business's component parts can trace their history back to the late 19th century, when the fields of electrical testing and marine surveying were growing rapidly.
Intertek's activities span most major industries today and the group has 30,000 employees. The group's earnings per share have risen by 150% over the last six years and operating profit is up by 180%. The company's dividend credentials are impressive too -- the annual payout has risen from 14.8p in 2006 to an expected payout of 40.7p for the 2012 financial year, a 175% pay rise for shareholders in six years!
The only fly in the ointment is the markets have already given Intertek shareholders ample rewards for the company's success, driving up the share price by 279% in the last five years alone.
While this compares very favourably to the 10% gain delivered by the FTSE 100 over the same period, it does mean that Intertek's shares trade on a price to earnings ratio of 26 times expected earnings for 2012. This means that Intertek's dividend yield is just 1.1% -- hardly a great starting point for a retirement income.
My Verdict
Intertek is clearly a high quality and successful company, but I feel that after such a long period of strong growth, it looks quite expensive. Given its present size, I expect that growth will slow and the company's premium P/E could gradually reduce to the point where it offers a more attractive yield.
Despite this, there's no doubt that Intertek's business has a long pedigree and seems likely to enjoy a strong future -- making it very suitable for a low-maintenance retirement portfolio.
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