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 Vedanta Resources (VED) (NASDAQOTH: VDNRF), an Indian-owned natural resources group with a wide range of assets, mainly in India and Africa.
Vedanta Resources vs. FTSE 100
In 2003, Vedanta was the first Indian company to list on the London Stock Exchange. Let's take a look at how the firm has performed against the FTSE 100:
|
Total Returns |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
5-Year |
|---|---|---|---|---|---|---|---|
|
Vedanta Resources |
(69%) |
331.5% |
(2.5%) |
(58.4%) |
17.4% |
4.5% |
(10.4%) |
|
FTSE 100 |
(28.3%) |
27.3% |
12.6% |
(2.2%) |
10% |
10.5% |
4.6% |
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.
Vedanta's 69% share price collapse in 2008 meant that 2009's 331% gain (including dividends) did little except return investors to the position they had been in before markets crashed. However, Vedanta has disappointed investors since then, as the firm's share price has fallen continuously, dropping from a peak of 2,900 pence in 2009, to today's level of 1,220 pence.
Overall, Vedanta has performed poorly against the FTSE 100, delivering a 5-year trailing average total return of -10.4%, compared to 4.6% for the index.
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 Vedanta Resources shapes up:
|
Item |
Value |
|---|---|
|
Year founded |
1979 |
|
Market cap |
£3.2bn |
|
Net debt |
$9.8bn |
|
Dividend Yield |
3% |
|
5 year average financials |
|
|
Operating margin |
21.4% |
|
Interest cover |
5.3x |
|
EPS growth |
(41.1%) |
|
Dividend growth |
9.5% |
|
Dividend cover |
4.8x |
Here's how I've scored Vedanta Resources on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
|
Longevity |
It's still pretty young. |
3/5 |
|
Performance vs. FTSE |
Not great. |
1/5 |
|
Financial strength |
Lots of debt, thanks to a long stream of acquisitions. |
3/5 |
|
EPS growth |
Poor, but Vedanta has remained profitable. |
2/5 |
|
Dividend growth |
Up by 260% since 2005. |
4/5 |
|
Total: 13/25 |
||
Cairn Energy shareholders may know Vedanta Resources as the company that paid $8.6 billion in 2011 for a 58.5% stake in Cairn's Indian subsidiary, Cairn India. The deal generated a $3.5 billion payday for Cairn shareholders but is one of the reasons that Vedanta has a net debt of $9.8 billion, which currently requires interest payments of around $100 million per month, according to Vedanta's latest accounts.
Vedanta has used debt to expand rapidly into a large, multi-commodity resources group. The underlying businesses seem fairly attractive, but paying down the resulting debt is going to be a challenge that could threaten Vedanta's profitability and dividend growth, especially if commodity prices weaken.
My verdict
I don't think that Vedanta's high debt levels and dependence on commodity prices are a good combination for a retirement share, as they make it hard to have too much confidence in the firm's ability to pay reliable, growing dividends. The firm's dividend yield of 3% is also too low to be worth the risk over a FTSE 100 tracker, so Vedanta Resource is not a share I would add to my retirement portfolio.
The best FTSE 100 dividends?
Vedanta is less risky than some FTSE 100 natural resources companies, but I have to admit that the firm did not make it into The Motley Fool's latest special report, "5 Shares To Retire On".
The Fool's in-house experts recently crunched the numbers on every company in the FTSE 100 and identified five of the best blue chip dividend shares in the UK. I believe that this should be essential reading for anyone aiming to build a diversified, income portfolio for their retirement.
If you would like to know more, click here now to download your copy of this report -- it's free, but availability is strictly limited, so don't delay.
