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 Glencore Xstrata (GLEN 0.57%), the result of the recent merger of mining firm Xstrata and commodity trading giant Glencore International.
Glencore Xstrata vs. FTSE 100
Since the merger only took place on 2 May, the combined company doesn't yet have any operating history. Glencore International's history as a publicly traded company is also short -- it only listed on the LSE in 2011.
To provide the best picture possible of the two companies' performance against the FTSE 100, I've combined historical data for both in this table:
|
Total Returns |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 YTD |
|---|---|---|---|---|---|---|---|
|
Glencore International |
n/a |
n/a |
n/a |
n/a |
n/a |
(7.9%) |
(9.8%) |
|
Xstrata |
40.1% |
(81.2%) |
75.2% |
35% |
(33.7%) |
11.1%* |
n/a |
|
FTSE 100 |
7.4% |
(28.3%) |
27.3% |
12.6% |
(2.2%) |
10% |
10.5% |
Source: Morningstar; * denotes estimated. 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.
Xstrata's performance record was fairly good for a mining firm, but Glencore has yet to return to its IPO price of more than 500 pence per share, and is currently around 33% below this, at 350 pence.
What's the score?
Given the level of change involved in merging two such large and different companies, I'm not sure that historical data is much use as a guide to future performance, so in the table below I have created a snapshot of current and forecast data for the firm. This might give us an idea of what we can expect from Glencore Xstrata:
|
Item |
Value |
|---|---|
|
Year founded |
2013 |
|
Market cap |
£46.4bn |
|
Net debt |
$30.0bn |
|
Dividend Yield |
2.9% |
|
Forecast financials | |
|
Forward P/E |
9.5 |
|
Operating margin |
3.4% |
|
EPS growth |
-2.2% |
|
Dividend growth |
0% |
|
Dividend yield |
2.9% |
Here's how I've scored Glencore on each of these criteria:
|
Criteria |
Comment |
Score |
|---|---|---|
|
Longevity |
A new combination of older parts. |
2/5 |
|
Performance vs. FTSE |
Too early to say. |
3/5 |
|
Financial strength |
A lot of debt and low profit margins. |
2/5 |
|
EPS growth |
Historically quite volatile. |
3/5 |
|
Dividend growth |
The company's policy is to hold or grow the dividend each year. |
3/5 |
|
Total: 13/25 |
Glencore Xstrata's score of 13/25 almost certainly under-estimates the potential of this company to provide a dividend income derived from commodities. However, the problem is we don't yet know how successfully Glencore Xstrata will combine its operations. The firm has promised to deliver more than $500 million of savings, mainly through a $450 million reduction in marketing costs, but it does face a number of challenges, including dealing with the loss of many of Xstrata's senior management team, who had more mining experience than their Glencore counterparts.
Coal could also prove a drag on profitability -- 25% of Glencore Xstrata's earnings are expected to come from coal, but cheap shale gas has meant that U.S. demand for coal has fallen, depressing world coal prices.
My verdict
It's simply too early to say whether Glencore Xstrata will prove to be a good retirement share. For me, while I think it is an interesting potential investment, this firm's lack of track record means that it isn't a share I would consider for my retirement portfolio.
The best FTSE 100 dividends?
Dividend prospects for Glencore Xstrata shareholders are fairly uncertain, and that's just one of the reasons the firm failed to 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.
