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, we'll take a look at GlaxoSmithKline (LSE: GSK.L) (NYSE: GSK.US), the U.K.'s largest pharmaceutical company.
Performance-enhancing drugs
GlaxoSmithKline's product range includes consumer brands such as Lucozade, Sensodyne, and Nicorette, as well as its prescription drugs and vaccines. It's a classic defensive stock and has been far less volatile than the FTSE 100 over the last five years:
|
Total Return |
2007 |
2008 |
2009 |
2010 |
2011 |
Trailing 10-year Average |
|---|---|---|---|---|---|---|
|
GlaxoSmithKline Total Return |
(1%) |
4.8% |
7.4% |
(1.2%) |
24.2% |
4% |
|
FTSE 100 Total Return |
7.4% |
(28.3%) |
27.3% |
12.6% |
(2.2%) |
6.9% |
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.
Although GSK's trailing 10-year average total return is below that of the FTSE 100, anyone holding GSK shares from 2007 until today would have seen a total return, including reinvested dividends, of 40%, compared with 12% for the FTSE 100 total return 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 GlaxoSmithKline shapes up:
The basics
|
Year Founded |
2000* |
|
Market Cap |
74 billion pounds |
|
Net Debt |
9.2 billion pounds |
|
Dividend Yield |
4.7% |
*GSK was the result of a series of mergers, the last of which took place in 2000. The component companies are much older.
Five-year average financials
|
Operating Margin |
28.7% |
|
Interest Cover |
13.7 times |
|
EPS Growth |
33.8% |
|
Dividend Growth |
7.8% |
|
Dividend Cover |
1.7 times |
Source: Morningstar, Digital Look, GlaxoSmithKline
And here's how I've scored GlaxoSmithKline on each of these criteria:
|
Criterion |
Comment |
Score (out of 5) |
|---|---|---|
|
Longevity |
A new company but has a long history with some major brands. |
4 |
|
Performance vs. FTSE |
A strong, defensive performer. |
4 |
|
Financial Strength |
Quite heavily geared but has high profit margins and ample cash. |
4 |
|
EPS Growth |
Inconsistent, but likely to be steady over the long term. |
3 |
|
Dividend Growth |
Above inflation and stable -- ideal for retirees. |
4 |
|
|
|
Total: 19/25 |
A score of 19 is fine in my view and makes GlaxoSmithKline an attractive candidate for a retirement fund portfolio. Indeed, I hold these shares in my own retirement fund.
Expert pick
I'm not the only investor who rates GlaxoSmithKline for its long-term prospects. Far more accomplished investors than I have invested heavily in GSK shares, including Neil Woodford, one of the most successful fund managers in the City. Woodford's dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years, and he currently looks after 20 billion pounds of private investors' money -- more than any other City manager. You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report: "8 Shares Held By Britain's Super Investor." The report is free and available for a limited time only.
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Further investment opportunities:
